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Ten Largest Deposits and Withdrawals from the U.S. Treasury’s Federal Reserve Account

Posted on August 8, 2019 by No Author -

Of Black Walnut Trees and ‘the Debt’

Posted on August 8, 2019 by Kerry Pechter -

Neighbors in their early 70s invited us for drinks and hors d’oeuvres last Sunday afternoon. From the patio, we watched their poodles run through a two-acre orchard of adolescent black walnut trees. We ate sweet cherries, stuffed grape leaves, and toasted bread with cheese.

“Now tell me again,” said my neighbor, who works as a public health administrator, “why I shouldn’t worry about the size of the federal debt.”

Uncle Sam’s gargantuan finances are back in the news. Americans are confused. Only a few years ago, Congress complained that we’re condemning grandchildren to debt servitude. Yet, this summer, Congress and the President quietly raised the debt ceiling and added substantially to the annual budget deficit. A few legislators were angry, but not enough to make a difference.

As you’ve probably guessed by now, the debt is framed as an emergency only when politically useful. Our giant debt actually represents some good things, like personal savings and bank reserves. It’s a function of our trade deficit, and the fact that the dollar is the world’s reserve currency. The debt rescued the banks during the financial crisis. It re-inflated the stock market. The debt indicates that government has spent far more into the economy than it has taxed out, and many of us are the richer for it.

For the reasons listed below (with which you may strenuously disagree), I’ve chosen to stop worrying about the debt:

Reason 1. The debt is, in part, an inevitable result of running a big trade deficit. When the Chinese and others buy U.S. Treasuries, they use the dollars that we spent on their goods. Just as the Saudis recycled “petrodollars” to U.S. banks 40 years ago (creating a big mess), the Chinese recycle excess dollars to the U.S. by buying, among other things, Treasuries. As long as foreign exporters accept our currency for their goods, their countries will buy Treasuries. Is there a down side to running a big trade deficit? Yes. But that’s a different story.

Reason 2. One person’s debt is another person’s asset. We tend to forget that Treasury bonds aren’t merely liabilities. Under our system, oddly enough, government IOUs are money. The dollars in your pocket are Federal Reserve notes—just like Treasuries, except that they’re 100% liquid and pay no interest. To me, the U.S. debt, as assets, represents the market cap of the United States—much larger and less risky than the shares of a company like Apple or Facebook.

Reason 3. When we buy Treasuries or pay taxes, we’re financing the release of money into the U.S. economy. According to the Daily Treasury Statement for 8-1-2019, the U.S. Treasury’s “expenses” in the first nine months of 2019 included $765 billion in Social Security benefits, $288 billion in payments to defense contractors, $283 billion in IRS refunds, and $241.5 billion in interest to holders of Treasury securities. It also paid out about $1 trillion for Medicare, Medicare Advantage plans, and Medicaid, which becomes revenue for the private health care industry. Even if you don’t work for the government or receive direct government transfers, a chunk of your income consists of government spending (some of which was borrowed).

Reason 4. If not for the debt, the stock market wouldn’t be so high. The debt indicates that the government has spent about $22 trillion more into the private economy over the years than it has taxed out. That extra money has driven up the cost of almost everything we buy (by roughly a factor of 10, since 1967), including the prices of the stocks and homes we hold dear. It’s inconsistent to hate the debt but love the bull market. They’re two sides of the same coin.

Reason 5. That “debt clock” in the Wall Street Journal suggests that the U.S. is falling down a bottomless well of debt. Not exactly. According to the Daily Treasury Statement mentioned above, the U.S. Treasury has rolled over almost $10 trillion in marketable Treasury bills, note, bonds, TIPS, etc., so far this year. (It has rolled over an additional $64 trillion in non-marketable Government Account Series bonds.) The U.S. refinances some of its debt every day. It’s not delaying a $22 trillion tab into the future, where our grandchildren will be obligated to pick it up.

Reason 6. Private debt, not public debt, is the greater threat to financial stability. Uncle Sam has the big shoulders and longevity to carry much more debt for much longer than individuals or businesses do. Scare tactics about the federal debt strike me as an intentional distraction from the size of the private debt. Excess private debt caused the financial crisis; public debt resolved it. Fortunately, U.S. households are rich enough—with an estimated net worth of $108 trillion—to carry about $15.7 trillion in mortgage and consumer debt. But the market value of that wealth could change overnight, and the debt would still be there.

That’s more or less how I reassured my neighbors last week as we sat on their patio. They listened to these eccentric ideas more patiently than most people. But they’re unusual individuals. Twenty-four years ago they planted several long rows of black walnut saplings on their property as an investment. With careful pruning, the still-slender trees have grown tall and straight. They may or may not ever be worth much, but it’s soothing to watch them grow.

‘Auto-portability’ gets green light from DOL

Posted on August 1, 2019 by Editorial Staff -

After five years of lobbying, explaining and persuading, Retirement Clearinghouse (RCH) have won a dispensation from the federal government to accept fees for provision of a web-based service by which old 401(k) accounts will automatically follow workers when they change jobs and join a new plan.

On July 31, the Department of Labor (DOL) released a final Prohibited Transaction Exemption (PTE) for the service, which RCH calls “auto portability.” Last November, the DOL issued an Advisory Opinion on the matter, identifying RCH as a fiduciary when it provides the service.

The proprietary technology, which aims to reduce “leakage” of savings from small-balance 401(k) accounts when workers change jobs—and thereby to increase the adequacy of Americans’ savings when they reach retirement age—has yet to be adopted by major 401(k) recordkeepers, although RCH has spent five years educating them about the service.

“There’s still a big bunch of heavy lifting ahead of us,” RCH CEO Spencer Williams told RIJ this week. “When the first recordkeeper goes public that they’re adopting auto-portability for their clients, we’ll have reached the peak.”

RCH required the blessing of the DOL in order to market its product to recordkeepers because the service involves DOL-regulated retirement plans, because it relies on defaulting plan participants into the program without positive consent, and because RCH will charge a fee for the service while in the role of a fiduciary.

“‘Negative consent’ is what we needed, for the simple reason that we have an unresponsive population,” Williams said, referred to plan participants who often forget about small 401(k) accounts when they change jobs.” Currently, plan sponsors are allowed to send small, abandoned 401(k) accounts to custodial IRAs run by trust companies, which earn a fee for warehousing the assets while trying to reunite the accounts with their owners.

“The exemption permits RCH to receive certain fees in connection with the transfer under the RCH Program, of an individual’s Default IRA or Eligible Mandatory Distribution Account assets to the individual’s New Plan Account, without the individual’s affirmative consent, provided the conditions described below are satisfied.”

The majority owner of Retirement Clearinghouse is Robert L. Johnson, founder and chairman of The RLJ Companies in Charlotte, NC. Williams and Tom Johnson, executive vice president, both of whom are former MassMutual executives, have led the RCH initiative since its inception in 2014.

In tandem with the Advisory Opinion on auto portability issued by the DOL in November 2018—which identifies RCH as the fiduciary when a participant’s small-balance terminated account or safe-harbor IRA are automatically rolled into a participant’s current employer plan—the final PTE completes the regulatory framework for auto portability.

Auto portability (https://www.rch1.com/auto-portability) is the routine, standardized, and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan. According to the Auto Portability Simulation developed by RCH, cash-outs of small accounts could be cut by two-thirds under a scenario where auto portability is broadly adopted and remains in force for a generation—and $784 billion in retirement savings would be preserved.

RCH remains the only independent provider that defines its primary business as the consolidation of retirement savings into active 401(k) or IRA accounts and provides plans and their participants with services that streamline the seamless transfer of savings between retirement accounts. The RCH Auto Portability service, which automates the consolidation process for small accounts, has been in operation since 2017.

On behalf of a large plan sponsor in the health services sector, RCH completed the first-ever fully automated, end-to-end transfer of retirement savings from a safe-harbor IRA into a participant’s active account in July 2017. To learn more, go to https://rch1.com/plan-sponsors/rch-portability-services.

Honorable Mention

Posted on August 1, 2019 by Editorial Staff -

Innovator “Buffer ETFs” now trade on the Cboe

The August Series of Innovator S&P 500 Buffer ETFs have begun trading on the Cboe, Innovator Capital Management, LLC announced this week. The firm’s Defined Outcome ETFs are the subject of a patent application filed with the U.S. Patent and Trademark Office, and are considered U.S. Patent Pending (No. 6287474495).

“We are expanding the Innovator Defined Outcome ETF suite, listing an August series of S&P 500 Buffer ETFs,” said Bruce Bond, CEO of Innovator ETFs, in a release. These ETFs “allowing investors to participate in the market upside to a cap, while obtaining built-in downside buffers against loss.”

The Innovator S&P 500 Buffer ETFs, which are an alternative to structured index annuities (also known as registered index-linked annuities), give investors exposure to the S&P 500 Price Return Index (S&P 500) up to a cap, with downside buffer levels of 9%, 15%, or 30% over approximately one year.

The ETFs reset annually and can be held indefinitely. Innovator S&P 500 Buffer ETFs, with over $1 billion in AUM as of July 31, 2019, are among the fastest-growing new categories of ETFs in the market today.

Continuing educational efforts around Defined Outcome ETF investing, Innovator’s most recent webinar titled, “How RIAs are Implementing the Only ETFs with Built-In Buffers”, is available for playback at http://www.innovatoretfs.com/webinars.

Don’t fund Medicare-for-all with tax on savers: ARA

The American Retirement Association opposes any plan for funding an expansion of Medicare that involves raising the costs of retirement savers who are served by the plan advisors, plan administrators and others whom ARA represents, ARA CEO Brian Graff said in a release this week.

The ARA was responding to the “Medicare for All” proposal from Sen. Kamala Harris, a Democratic presidential aspirant. According to ARA, she proposes raising over $200 billion a year over 10 years in part by taxing stock and bond trading. Such a tax could hurt participants in 401(k) plans, Graff said.

“American workers aren’t day-traders,” he said in the release.

Graff also warned of the potential negative impact on retirement savers of Sen. Bernie Sanders (I-Vt)’s Inclusive Prosperity Act of 2019, which would generate up to $2.4 trillion in “public revenue from wealthy investors” to help pay for a program that would underwrite student loan debt forgiveness.

He also warned against Sen. Kirsten Gillibrand (D-NY)’s Wall Street Tax Act, which he said “purports to raise an approximate $755 billion over a decade to help pay for infrastructure improvements – again by including the stocks and bonds held by retirement savers.”

Lincoln Financial provides data on the cost of assisted living and long-term care services

More than one in two Americans turning 65 are likely to need some form of long-term care in their lifetime, according to the Department of Health and Human Services. Yet many do not plan accordingly and underestimate the cost of long-term care services by nearly 50%.

Lincoln Financial Group’s annual What Care Costs study shows that rates for long-term care services can vary greatly depending on the type of care and location, with national annual averages ranging from $49,920 for a full-time home health aide to $105,485 for a private room in a nursing home. To help consumers and advisors prepare for long-term care needs and expenses in their area, Lincoln provides its interactive What Care Costs map website, www.whatcarecosts.com/Lincoln.

Caregiver to care-recipient ratio is falling

Relatives and friends often provide informal care to the aged. But the caregiver ratio is projected to decrease from 4.8 caregivers per person in 2010 to 2.8 by 2030, when all baby boomers will be over age 65. A home health aide may be needed to assist with bathing or dressing.

The average national fee for a home health aide today is approximately $24 per hour, up 4% since 2016. For care in the home requiring the medical skills of a registered nurse, the national average for a home visit is $137, which can add up to $50,005 annually if visits are needed daily.

Consumers underestimate costs

Lincoln research finds that consumers estimate the annual expense of a private room in a nursing home to cost $54,0002. However, the actual national average for a private room costs $105,485 annually, up roughly 3% since 2016. A studio apartment in an assisted living facility averages $49,632 per year, up approximately three percent from 2016. With these types of costs, it’s not surprising that advisors estimate clients without a long-term care insurance solution can spend their savings two-to-three times faster than expected if long-term care is needed.

Confusion high, confidence low

Most people believe they will pay for care through Medicare, health insurance or Medicaid. However, Medicare and health insurance only cover very limited and specific types of long-term care, and Medicaid is only available to those meeting income and eligibility requirements. Many also expect to pay for long-term care using personal savings and assets, yet only a third of consumers feel confident of having the financial resources to pay for long-term care.

Today many different types of private long-term care funding solutions are available that may help mitigate the costs of care events. Hybrid solutions, which are life insurance or annuity products with long-term care riders, have been growing in popularity in the marketplace as they are designed to meet multiple client needs.

Lincoln provides the following tools and resources:

www.whatcarecosts.com. A searchable database of long-term-care costs for in-home services, skilled nursing homes and assisted living facilities for states and metropolitan areas nationwide. Enter the code ‘Lincoln’ in the upper right corner

The What Care Costs survey was designed and implemented by LTCG, a leader in long-term care administration services. The average costs of care are calculated from over 30,000 different providers at the national, state and MSA (metropolitan statistical area) level. What Care Costs is provided as a service by Lincoln Financial Group.

JPMorgan, Urban League, aim to boost financial wellness of African-Americans

JPMorgan Chase & Co. is committing $1.5 million over two years to help the National Urban League launch their new Financial Savings Initiative, a program that will help black households build savings and meet their long-term financial goals, the bank reported this week. The announcement is being made at the National Urban League Annual Conference in Indianapolis.

Through digital tools and coaching, the initiative aims to enable more black households to save, own homes, form and expand small businesses, and invest for retirement and college.

As part of the initiative, the National Urban League will select 10 Urban League affiliates from around the country to integrate financial technology tools into their financial coaching programs.

The program will include tools that are being identified, tested and scaled by JPMorgan Chase as part of the firm’s $125 million, five-year investment in financial health and specifically, through the Financial Solutions Lab.

Managed by the Financial Health Network in collaboration with JPMorgan Chase, the Financial Solutions Lab supports promising fintech innovations that can help people in the U.S. increase savings, improve credit and build assets. Financial Solutions Lab innovations have led to more than $1 billion in savings for U.S. residents to date.

‘The Specter of the Giant Three,’ and Other Gripping Yarns

Posted on August 1, 2019 by Editorial Staff -

In this edition of RIJ’s periodic roundup of recent academic research on retirement-related topics, we consider three recent papers and one from 2014 that we previously overlooked:

“The Specter of the Giant Three.” A warning about the rapid growth of three index fund providers—Vanguard, BlackRock and State Street Global Advisors—and the concentration of shareholder voting power in their hands.
“Skill and Fees in Active Management.” A Wharton professor shows that active fund managers can be so good at cleaning up inefficiencies in the equities market that they eliminate opportunities for further gain.
“Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities,” which proposes an improved design for variable income annuity products.
“The Use and Misuse of Income Data and Extreme Poverty in the United States,” which provides evidence that, even after welfare reform, government transfers have vastly reduced poverty in the U.S.

The Only Three Voting Shareholders?

Research Roundup

With the sustained popularity of passive investing, the “big three” index fund managers—BlackRock, Vanguard, and State Street Global Advisors—are expected to keep growing. If so, they will eventually become the “Giant Three” and will dominate shareholder voting in most large public companies.

In their paper, “The Specter of the Giant Three” (NBER Working Paper 25914), Lucian A. Bebchuk and Scott Hirst “document that the Big Three have almost quadrupled their collective ownership stake in S&P 500 companies over the past two decades” and that

They have captured the overwhelming majority of the inflows into the asset management industry over the past decade.
Each of them now manages 5% or more of the shares in a vast number of public companies.
They collectively cast an average of about 25% of the votes at S&P 500 companies.
The growth in the share of index funds at the expense of active funds has been partly due to growing levels of investment in ETFs.

More than 80% of all assets flowing into investment funds has gone to the Big Three over the last decade, and the number of positions in S&P 500 companies in which the Big Three hold 5% or more of the company’s equity has increased more than five-fold. Their average combined stake in S&P 500 companies quadrupled over the past two decades, from 5.2% in 1998 to 20.5% in 2017.

The proportion of total funds flowing to the Big Three has been rising through the second half of the decade, the authors write. Within two decades, the “the Big Three could well cast as much as 40% of the votes in S&P 500 companies within two decades,” the authors point out.

The paper warns that “the stewardship decisions of index funds in general, and the Big Three in particular, are afflicted by agency problems, including incentives to under-invest in stewardship and incentives to be excessively deferential to corporate managers. …These agency problems deserve the close attention of researchers, policymakers, and market participants.”

The Limits of Successful Stock-Picking

After adjusting for management fees and trading costs, does it make any difference in the long run whether you invest in actively managed funds or index funds? In his paper, “Skill and Fees in Active Management” (NBER Working Paper 26027, July 2019), Wharton finance professor Robert F. Stambaugh makes the case that, all else being equal, it doesn’t.

But the more investors herd into active or passive strategies, he told RIJ, the more likely that the advantages of doing so will decrease. “If there’s too much money under active management, then it will underperform, and if there’s too much money under passive management, then it will underperform,” he said in an interview this week.

“It’s like telling everyone about the best road to take to get to work. Eventually too many people will take it and it won’t be the best road anymore.”

Active managers labor under an irony: The better they get at identifying and taking advantage of mispriced securities, the higher their fees and trading costs and the fewer opportunities they have.

That’s not necessarily a bad thing for investors, Stambaugh points out in his paper. “Even though the industry can earn less by becoming better at what it does, the model does imply that greater skill produces stronger price correction in stocks. With this positive externality, there can still be a societal benefit to having active managers be more skilled. Having prices more accurately reflect underlying fundamentals can allow more efficient resource allocations.”

“The market provides new mispricing opportunities all the time, and in every quarter active managers will find a way to make money,” he told RIJ. But, net of fees, they won’t outperform passive funds, he added. “There may be some active managers that consistently outperform others, but they will charge higher fees. I’d love to be the last active investor after everyone else has gone into passive funds. That would be ideal.”

Towards a better group variable income annuity

“Participating life annuities” enable retirement plan participants to draw a variable but stable lifetime income from a pooled investment fund managed by a life insurance company. TIAA has offered that type of product for 60-some years, and the concept is gaining favor in Europe.

The challenge for the life insurer is this: how to manage and account for the investments, which fluctuate in value, so that retirees receive a smooth and potentially rising lifetime income stream, while also enabling the insurer to make a profit and comply with current accounting standards.

In their paper, “Accounting and Actuarial Smoothing of Retirement Payouts in Participating Life Annuities” (Insurance: Mathematics and Economics 71 2016), four economists from the U.S. and Germany propose a way for insurers to combine the use of an actuarial reserve fund with the fair market value accounting method—increasingly preferred over the historical cost value accounting method—to stabilize payouts from a variable fund while also allowing annuitants to reap “mortality credits” as members of the pool die off.

The authors, Raimond Maurer and Ivonne Siegelin of Goethe University, Olivia S. Mitchell of the Wharton School, and Ralph Rogalla of St. John’s University in New York, demonstrate that their approach yields payouts comparable to those of TimePension, a Danish annuity model. TimePension distributes a stable income from a primary account owned by each investor and from (during down-market years) a buffer fund managed by the product provider. Under a transparent formula, the buffer fund absorbs part of the investors’ gains during up-market years.

“We have implemented both approaches, the traditional accounting/actuarial smoothing versus the formula-based buffer fund,” Maurer told RIJ in an email. “We find that from the policyholders perspective (i.e., the demand side) the two approaches result in similar outcomes. Yet the traditional approach is (slightly) better from the insurers perspective (i.e., the supply side) in terms of lower shortfall risk. The intuition behind that is, that the traditional approach is more flexible compared to a ‘static,’ formula-based approach.”

Are We Overestimating the Number of Poor in the U.S.?

Despite benefits-reducing welfare reform, U.S. government transfer payments are still quite effective in reducing poverty and many people who are supposed to be poor are not. So say Bruce D. Meyer, Derek Wu, and Victoria R. Mooers of the University of Chicago and Carla Medalia of the U.S. Census Bureau, in their paper, “The Use and Misuse of Income Data and Extreme Poverty in the United States” (NBER Working Paper 25907).

“Recent research suggests that rates of extreme poverty, commonly defined as living on less than $2/person/day, are high and rising in the United States,” they write. “But of the 3.6 million non-homeless households with survey-reported cash income below $2/person/day, we find that more than 90% are not in extreme poverty once we include in- kind transfers, replace survey reports of earnings and transfer receipt with administrative records, and account for the ownership of substantial assets.”

Many Americans have been misclassified as poor, the paper says. “Nearly 80% of all misclassified households are initially categorized as extreme poor due to errors or omissions in reports of cash income. Of the households remaining in extreme poverty, 90% consist of a single individual. An implication of the low recent extreme poverty rate is that it cannot be substantially higher now due to welfare reform, as many commentators have claimed.”

Most/Least Expensive States for a Private Room in a Skilled Nursing Home

Posted on August 1, 2019 by No Author -

Apple Stock, Bourbon and Cigars

Posted on August 1, 2019 by Kerry Pechter -

One of my favorite summer rituals is to spend a weekend with two old friends. We’ve known each other for decades. We used to meet at a cabin near a pond in northeastern Pennsylvania. At night we would sit by the water, drinking bourbon or non-alcoholic beer. We would smoke our only cigars of the year.

Years ago, we talked about our wives and children. Lately, we talk about money. One has been a professor and writer. The other has written a dozen books over the years. Both are single, and both have spawned not just two grown children but one child each by a second marriage.

The professor, as I’ll call him, has amassed a chunk of equity by buying and fixing up successively bigger homes. He started with a two-family row house, renting out the first floor. He rehabbed a historic townhouse in a major city, then a big white hip-roofed, chateau-style fixer-upper in the suburbs. He finally settled into a sprawling house next to a nature preserve in a desirable school district.

When he downsizes to a condo in the near future, he’ll net a mid-six-figures sum. He’s also saved a fair amount of money in a 403(b) plan, benefiting from a generous matching contribution and from the 2009-2019 bull market. He intends to teach part-time into his 70s. He has already claimed Social Security, which helps pay for the support of his 16-year-old.

The author, as I’ll call my other friend, has been a success at writing books. There’s a framed copy of a $150,000 royalty check on his office wall. Having married extremely well the first time around, he’s participated deeply in the entire 35-year bull market and in the long housing boom. Unlike most people, he has had great success picking individual stocks. He started buying and holding Apple stock in the mid-1980s, and has selected other long-term winners. He does not own mutual funds. Between book projects, he travels. He has an enviable fine art collection.

Career-wise, these two men are a bit unusual. Neither has spent long periods working for a large company. Emotionally, their lives have been turbulent, though probably no more or less than many other Boomers’. Both have been do-it-yourselfers, with respect to their investments in real estate and securities. Like most professional writers, both have been, and have had to be, lifelong hustlers. I mean that in the best sense of the word.

Of the two, the writer, though the richest of the three of us, seems to be more worried about his financial situation. He finds it reassuring to keep his money at a large brokerage, and to pay a financial advisor 80 basis points a year.

As far as I can tell, he’s worried about having enough yield to live on. He doesn’t want his net worth to drop. Many wealthy older people feel that way. A four percent annual allowance from $2 million is, after all, only $80,000 a year before taxes. And if the stocks take a dive, an uncomfortable sense of enforced austerity threatens to set in.

An annuity might relieve the pressure, I’ve told him. But at today’s interest rates, it would take $1 million to fund a single-life immediate annuity paying about $72,000 a year or an annuity with a living benefit paying $50,000 a year to start. That’s not enough for him to live on, however, and he’d have to part with Apple stock to fund it. That would be prohibitively painful.

As an alternative, I’ve suggested a deferred income life annuity with cash refund starting at age 80. It would pay about $66,000 a year. If he died before recouping the entire $400,000 premium, his 10-year-old would receive the unpaid difference. He won’t do it, and I won’t try to persuade him. Buying risk has served him well. He’s not about to become a risk-seller.

Why Are Stocks So High?

Posted on August 1, 2019 by Kerry Pechter -

The stock market notoriously climbs a “wall of worry.” But a new academic paper, “How the Wealth Was Won,” suggests that we probably should be worried about a rising stock market that, for decades, has grown much faster than economic growth can explain and where the “equity premium” has sunk to low levels.

The paper’s authors, Martin Lettau of Berkeley, Sydney Ludvigson of NYU and Dan Greenwald of MIT, divide the past 67 years into two eras. From 1952 to 1988—from roughly the birth of the H-bomb to the Savings and Loan Crisis—fundamental economic growth accounted for 92% of the increase in stock prices, they found.

But from 1989 to 2017 (from the end of Communism through the tech boom, two Gulf Wars, the digital boom, the Iraq War, and the Great Financial Crisis) only 24% of the $23 trillion in real equity wealth created by the non-financial sector can be attributed to economic growth, the authors found.

Greenwald

“It was largely luck that stock returns were as high as they have been since 1989,” MIT’s Greenwald told RIJ this week. “Our model predicts that the rate of returns on equities, including dividends and buybacks, should have been 5.3% a year. But they’ve averaged a 10.6% return.” That’s about twice the rate that the traditional “equity risk premium”—the reward to investors for taking the extra risk associated with equities vs. bonds—would normally suggest.

Something else must have been going on, and the authors believe it was changes in what they call “factors shares.” By this they mean the division of the U.S. economy’s fruits between investors and workers. “Factors shares have been more relevant than economic growth as a measure of fundamental value in the stock market,” the paper said.

For decades, the profits have largely accrued to investors (in the form of dividends, stock buybacks and capital gains) and not to workers (in the form of wages). “What’s unusual, over this entire period, the share of output going to profits has grown, relative to the share going to wages,” Greenwald said, adding that “workers still typically get more than two thirds of output.”

He and his co-authors attributed 54% of the $23 trillion in real equity wealth created by the nonfinancial sector from 1989 to the end of 2017 to “reallocation of rents to shareholders in a decelerating economy… Economic growth accounts for just 24%, followed by lower interest rates (11%) and a lower risk premium (11%).”

“This large divergence is attributable to the good luck equities have enjoyed over the post-war period, driven primarily… by a string of favorable factors share shocks that redistributed rents to shareholders,” the paper said. In economic terms, “rents” means unearned income, passive income or, technically, “any payment to an owner or factor of production in excess of the costs needed to bring that factor into production.”

At the same time, the “equity premium” is low. That is, investors have shown a willingness to pay a lot for stocks. “We know that asset prices and stock valuations vary by too much to be driven by cash flows,” he said. “When the stock market goes up by two percent in one day, it doesn’t mean that investors think that profits will go up by two percent. You can attribute that to market demand. Effectively, investors are saying that they are willing to hold risk at a lower price.”

There are many possible causes and effects associated with the sharp change in factors shares since 1989—the loss of labor’s bargaining power, the export of manufacturing jobs, automation, globalization, monopoly pricing power, the retirement savings boom, or massive deficit spending—but this paper wasn’t meant to pursue them, Greenwald said.

Whatever the reasons for the shift, workers have been the losers. Even though millions of Americans have been investing in mutual funds through workplace retirement plans for 30 years, and some of them have accumulated significant nest eggs, there’s apparently still not much overlap between workers and investors.

“Only about half of households report owning stocks either directly or indirectly in 2016,” the paper said. “Even among those households that own equity, most own very little: the top 5% of the stock wealth distribution [equity owners] owns 76% of the stock market value and earns a relatively small fraction of income as labor compensation.”

Depending on your point of view, you might conclude from this paper either that the stock market is dangerously overvalued, or that the shift in factor shares and a shrinking risk premium justifies current stock values, or that the height of the stock market is a symptom of advanced inequality in the U.S., rather than the sign of a healthy economy.

Is Politics Getting to the Fed?

Posted on July 25, 2019 by Robert J. Barro -

From the early 1980s until the start of the financial crisis in September 2008, the U.S. Federal Reserve seemed to have a coherent process for adjusting its main short-term interest rate, the federal funds rate. Its policy had three key components: the nominal interest rate would rise by more than the rate of inflation; it would increase in response to a strengthening of the real economy; and it would tend toward a long-term normal value.

Accordingly, one could infer the normal rate from the average federal funds rate over time. Between January 1986 and August 2008, it was 4.9%, and the average inflation rate was 2.5% (based on the deflator for personal consumption expenditure), meaning that the average real rate was 2.4%.

The long-term normal real rate can be regarded as an emergent property of the real economy. From an investment and saving standpoint, economic equilibrium balances the benefit from a low safe real interest rate (which provides low-cost credit for investors) against the benefit from a high real rate (which implies higher returns for savers).

In the Great Recession, the federal funds rate dropped precipitously, reaching essentially zero by the end of 2008. That was appropriate, owing to the depth of the crisis. But what few expected was that the federal funds rate would remain close to zero for so long, through the end of then-Fed Chair Ben Bernanke’s term in January 2014 and beyond.

The Fed’s prolonged low interest-rate policy, which was supplemented by quantitative easing (QE), seems misguided, considering that the economy had long since recovered, at least in terms of the unemployment rate. The nominal federal funds rate was not placed on an upward trajectory until the end of 2016, starting under then-Chair Janet Yellen and rising gradually to 2.4% in December 2018 under her successor, Jerome Powell. Throughout the period up to late 2016, the negative real federal funds rate was well below its own long-term normal.

It is hard to view today’s nominal federal funds rate of 2.4% as high. With an inflation rate of 1.7%, the real federal funds rate is only 0.7%. And yet the Fed’s “high” interest-rate policy was fiercely attacked by Wall Street, which regarded it as a mistake, and as the cause of the weak stock market from the end of 2018 through early 2019. Many financial commentators argued that the Fed should pause its monetary-policy “normalization” and eventually shift to interest-rate cuts.

That view is not crazy if you are focused solely on boosting the stock market. On average, interest-rate cuts do tend to stimulate the stock market by making real returns on bonds less competitive. But that does not mean it is good economic policy always to be cutting rates, as U.S. President Donald Trump seems to think.

It is no secret that Trump regards the stock market’s performance as an indicator of his own performance. But it has been surprising to see the Fed join the rate-cutting bandwagon. In early 2019, it indicated that it would pause its rate increases, and now it is signaling a sequence of rate cuts in the near future. I, for one, cannot see how the Fed’s sudden reversal fits with the coherent monetary policy that it maintained from 1984 until the financial crisis.

Nonetheless, Powell has tried to justify the move toward rate cuts as consistent with that prior policy. First, he points out, rightly in my view, that inflation has remained tame. Then, he argues that the economy’s prospects may be weaker than low unemployment and recent strong real GDP growth suggest. There may be something to that argument, given Trump’s trade war and worsening prospects for global growth.

Even so, it does not follow that rates should be cut before actual economic weakness appears. I do not know of convincing evidence that the Fed should “get ahead” of a slowing real economy.

The danger, then, is that the Fed will be tempted to cut rates as a result of external pressure, on the assumption that it can always rationalize cuts by pointing to variables that seemed to augur a growth slowdown sometime in the future.

It is telling that Powell has not mentioned (at least that I have heard) the fact that the nominal and real federal funds rates remain well below long-term normal values. (This deviation is even more apparent for interest rates in some other advanced countries, such as Germany and Japan.)

The desire to restore normalcy should still be putting upward pressure on rates, just as it did during the period of rate increases between December 2016 and December 2018. Indeed, it was Bernanke’s earlier failure to initiate the normalization process that made things more difficult than necessary for Yellen and Powell.

My view is that the shift in 2019 away from normalization is primarily due to the intense opposition to further rate increases last December, when the loudest objections came, notably, from stock-market analysts and the Trump administration.

The entire point of central bank independence is to establish a credible monetary policy by insulating the relevant decision-makers from such influence. That is what we learned from the early 1980s, when Fed Chair Paul Volcker hiked the federal funds rate up to the level necessary to choke off inflation.

The big difference, of course, is that President Ronald Reagan supported Volcker, whereas Trump is Powell’s chief antagonist. Powell’s challenge, then, is to maintain Volckerian discipline and independence in the face of growing political pressure. At the moment, his prospects for success are not great.

House MEP bill could fuel pension risk transfer deals

Posted on July 25, 2019 by Editorial Staff -

“The Rehabilitation for Multiemployer Pensions Act of 2019,” or H.R. 397, has passed the House of Representatives. Word on the street is that, if the bill becomes law, it could generate billions of dollars in new business for life insurers such as Prudential, MassMutual and Principal Financial that are active in the pension risk transfer business.

According to a Congressional Budget Office estimate, the bill calls for loans and grants to insolvent or near-insolvent multiemployer pensions totaling almost $49 billion between 2019 and 2024 and almost $68 billion over the subsequent decade.

The plans, known as MEPs, are defined benefit pension plans that cover workers at more than one company. The workers or the companies in the plan typically have something in common, such as the same union or the same industry.

Introduced by Ways & Means Committee chair Richard Neal (D-MA), the bill would provide certain insolvent or near-insolvent multiemployer defined benefit pension plans with loans and grants from the government. The newly created Pension Rehabilitation Administration within in the Department of the Treasury would administer the loans.

Under the bill, certain pension plans facing insolvency could apply to the PRA for a loan or apply jointly to the PRA and Pension Benefit Guaranty Corporation (PBGC) for loans and grants; some plans would be required to apply.

Those loans and grants could be used to buy group annuities from a life insurer. According to the bill, the annuity contracts purchased shall be issued by an insurance company which is licensed to do business under the laws of any State and which is rated A or better by a nationally recognized statistical rating organization, and the purchase of such contracts shall meet all applicable fiduciary standards under the Employee Retirement Income Security Act of 1974.

A plan could borrow up to the amount it needed to pay lifetime benefits to people who already receive benefits (referred to as being in pay status), to former employees who are entitled to receive benefits in the future (called terminated vested participants), and to their beneficiaries.

The loan period would be 30 years and the interest rate would be tied to the rate for 30-year Treasury bonds. If the PRA evaluated the application and determined that a plan could not repay a loan in full and still remain solvent, the plan would receive a smaller loan, and the difference would be covered by grants from PBGC.

Those grants could not exceed the estimated value of benefits that would otherwise be guaranteed under current law by PBGC if the plan was insolvent on the day of its application. Pension plans would not be required to repay the grants received from PBGC.

The bill also includes several provisions that would increase revenues, including ones that would modify the required distribution rules for certain beneficiaries of tax-favored retirement plans after the death of the employee or account holder, increase penalties for certain required filings and notices, and require information sharing related to the heavy vehicle use tax.

Envestnet updates ‘financial wellness’ app

Posted on July 25, 2019 by Editorial Staff -

Envestnet MoneyGuide, provider of the widely used MoneyGuidePro financial planning software, this week released an enhanced version of MyBlocks, a digital client engagement tool for advisors. Its part of Envestnet’s effort to delivering “financial wellness” to advisors and end-clients.

On the MyBlocks user interface, there are bite-sized “blocks” linking users to information about financial wellness topics such as: Social Security, “retirement compatibility,” college loan debt, and building emergency funds. MyBlocks is a separate product offering outside of the firm’s MoneyGuide suite.

An Envestnet release described MyBlocks as a “digital marketing tool to accelerate the path from prospect to client.”

“We wanted to create a familiar user experience to break down client and advisor inhibitions toward financial planning,” said Tony Leal, President of Envestnet MoneyGuide, in the release.

Twenty-one blocks are currently available, with more in development. Each block is grouped by topic, such as:

Protect Your Family: life insurance and long-term care
Explore Retirement Topics: social security, health care, and longevity
Have Some Fun: retirement compatibility game and an inflation quiz
FastPath to Freedom: credit card debt, college loan debt, retirement savings, building an emergency fund and, saving for an experience or financial goal
Blocks addressing long-term care analysis, income protection, and financial goals and concerns are scheduled to be released later this quarter. The current iteration includes:

A new self-registration feature that advisors can use for existing clients or as a prospect-engagement and lead-generation tool. It also facilitates email and social media marketing efforts.

Integrated data aggregation with Envestnet | Yodlee. A suite of Yodlee FinApps allows for linking accounts, viewing a summary of accounts, reviewing transactions, budgeting, and analyzing expenses.

Capability for advisors with MoneyGuide subscriptions to import a full financial plan, eliminating the need to request paper statements.

Enhanced prospecting feature with Redtail CRM. Prospects who go through MyBlocks self-registration will be imported into Redtail as a new prospect and/or household. Alerts can be created in Redtail to notify the advisor when a new prospect registers. Prospect workflows and activities can also be set up within Redtail for MyBlocks prospects.

Overall, MyBlocks can serve as the digital component of a hybrid digital/human advice model, helping advisors save time and serve middle-class customers that they might not otherwise be able to serve cost-effectively. “Because they can be incorporated into a collaborative, or even a self-service model, blocks open up financial planning to a new audience that was previously priced out of the market,” said Joel Bruckenstein, the fintech expert.

MyBlocks integrates with MoneyGuideOne, MoneyGuidePro, and MoneyGuideElite. Additional blocks and integrations will be rolled out throughout 2019 and continue into 2020. Those who purchase MyBlocks before Sept. 30, 2019, will receive free aggregation with Yodlee.

Your copy of ‘How America Saves,’ small biz edition

Posted on July 25, 2019 by Editorial Staff -

Vanguard today issued its sixth annual How America Saves: Small business edition—a comprehensive assessment of plan design trends and participant savings behavior in small business 401(k) plans served by Vanguard Retirement Plan Access (VRPA).

The new research, a companion piece to the firm’s ‘How America Saves 2019‘ report on retirement savings in corporate retirement plans, finds that small business plan participants are benefiting from enhanced plan design features, including professionally managed allocations, which have led to increased plan participation and optimized portfolio construction. Similar to their large corporate counterparts, small business participant behavior has improved, with decreased trading activity and reduced plan withdrawals, Vanguard said in a release.

Participant use of professionally managed allocations has increased. In 2018, two-thirds of VRPA participants were invested in a professionally managed allocation, with a total of 61% of participants invested in a single target-date fund. Among new plan entrants, three-quarters of participants were invested in a single target-date fund.

The increased use of professionally managed allocations has also improved portfolio construction and reduced extreme equity allocations. The percentage of participants holding broadly diversified portfolios was 79% in 2018, while the percentage of participants with no allocation to equities was 3%. At the other extreme, the fraction of participants investing exclusively in equities was 7%.

In addition to the increased use of professionally managed allocations, Vanguard reports the following:

Automatic enrollment is increasing plan participation and plan deferral rates. Employees enrolled in plans with an automatic enrollment feature have an overall participation rate of 82%, compared with a participation rate of only 54% for employees hired under plans with voluntary enrollment. Additionally, for individuals earning less than $30,000 in plans with automatic enrollment, the participation rate is more than double that of plans with voluntary enrollment.
Plan participants have decreased their trading activity. Participant trading or exchange activity is a measure of a participant’s willingness to change their portfolio in response to short-term market volatility. While daily trading is nearly universal for Vanguard defined contribution (DC) plans, with virtually all plans allowing it, only 7% of participants initiated one or more portfolio trades or exchanges in 2018.
Reduced plan withdrawals sustain retirement savings. Plan withdrawals are an optional plan provision, and participants using the feature could jeopardize their retirement savings if they rely upon it throughout their working career. Among VRPA DC plans, 85% allowed plan withdrawals for those who have reached age 59 ½. However, in 2018, less than 1% of participants in plans offering any type of withdrawal used the feature.

According to the Small Business Administration, small businesses represent 99.7% of American employers. VRPA—which is a service for retirement plans with up to $20 million in assets—was launched in 2011 to provide access to cost-effective, flexible 401(k) plans for small business owners and their employees.

Recordkeeping and other services are provided through Ascensus, one of the nation’s top recordkeeping firms, and include a call center, compliance testing and documentation, participant education materials, dedicated plan sponsor and participant websites and trustee services. Through VRPA, Vanguard serves 11,300 plan sponsors with 480,000 participants as of year-end 2018.

As of May 31, 2019, Vanguard managed $5.4 trillion in global assets. The firm, headquartered in Valley Forge, Pennsylvania, offers 414 funds to its more than 20 million investors worldwide.

Honorable Mention

Posted on July 25, 2019 by Editorial Staff -

Jackson enhances variable annuity benefits, adds Fidelity as money manager

Jackson National Life Insurance Company has announced several benefit updates to its family of variable annuities (VAs), including Perspective II and Perspective Advisory II. The changes are designed to streamline many of the add-on options offered through these products, by focusing on the most popular benefit designs.

As part of this launch, Jackson introduced LifeGuard Freedom Accelerator and Accelerator DB—two new benefits available through the Perspective family of VAs. LifeGuard Freedom Accelerator provides the potential for consumers to grow their income by offering higher levels of guaranteed withdrawals for each year they defer taking income. LifeGuard Freedom Accelerator DB adds the option for investors to leave a legacy, to help protect their families financially. Consumers who are seeking additional details about these benefits should partner with a financial professional who offers Jackson products.

Along with the release of the new benefits, Jackson has also introduced an option that provides the potential for more frequent increases of the guaranteed benefit value as a result of positive market performance. With these and other changes, Jackson has aligned the benefit platforms across its commission and fee-based VAs, Perspective II and Perspective Advisory II, providing consistency in options regardless of how consumers choose to engage their financial professionals.

Jackson also announced a new relationship with Fidelity Institutional Asset Management that will give advisors and their clients access to subaccounts managed by Fidelity through Jackson’s variable annuity offerings.

DPL Financial Partners, Lighthouse Life offer life settlements to RIAs

DPL Financial Partners, an insurance and annuity purchasing platform for registered investment advisors (RIAs), is partnering with Lighthouse Life Solutions, LLC (“Lighthouse Life”) to allow DPL’s member RIAs to sell unneeded life insurance assets for cash.

“Life settlements are a natural extension of our product lineup,” said DPL Founder and CEO David Lau in a release. He explained that many life settlement providers require a lengthy review process that includes a medical evaluation, but Lighthouse Life typically conducts a brief telephone interview with the insured and makes an offer within a few days, not weeks or months, later.

According to DPL’s Lau, life settlement transactions are best suited to older investors who own low cash-balance permanent life, or even term life policies when they typically have a convertibility feature. Clients may no longer need the policies because their liability profile has changed and/or they may be having trouble covering the premiums. In many cases, he said, liquidating the asset via a life settlement is a superior option to letting the policy lapse and receiving no value.

ACLI rebuts Wall Street Journal editorial on SECURE Act

Susan Neely, president and CEO of the American Council of Life Insurers (ACLI), made the following statement about today’s Wall Street Journal editorial “IRAs in Political Sights”:

“Low and middle-income Americans struggling to save for retirement are depending on the U.S. Senate to pass the SECURE Act. Only the wealthiest of Americans, less than one percent, use the ‘stretch IRA’ for estate planning. SECURE’s ‘stretch IRA’ provision shouldn’t derail a package to help millions of working Americans save for retirement.

“One provision of the SECURE Act will get more than 700,000 Americans who work for small businesses to save for retirement. The Senate should seize the historic opportunity at hand to pass this bill and confront America’s retirement savings challenges.”

The American Council of Life Insurers (ACLI) advocates on behalf of 280 member companies dedicated to providing products and services that promote consumers’ financial and retirement security. 90 million American families depend on our members for life insurance, annuities, retirement plans, long-term care insurance, disability income insurance, reinsurance, dental and vision and other supplemental benefits.

Scott Boyd joins Principal Financial

Principal Financial Group has hired Scott Boyd as head of sales for Workplace Savings and Retirement Solutions in the company’s Retirement and Income Solutions division, effective August 12, 2019. He will report to Jerry Patterson, senior vice president, Retirement and Income Solutions, at Principal.

Most recently, Boyd served as senior vice president for full-service teams at Prudential, focusing on offerings in the corporate, governmental, tax-exempt and Taft Hartley markets. He also managed the business development and intermediary relations teams, serving distributors.

Prior to Prudential, Boyd was a strategy consultant for PricewaterhouseCoopers in Boston. He has a BS degree in Civil Engineering from Union College in Schenectady, New York and an MBA from the Johnson School at Cornell University. Additionally, he holds Series 6, 63 and 26 registrations and is a registered representative of Prudential Investment Management Services LLC (PIMS).

Candidate Buttigieg proposes raising FICA limit to $250,000 to support Social Security

Democratic presidential candidate Pete Buttigieg wants to add new revenue to the Social Security program by raising the so-called FICA limit and boosting the amount of annual wages subject to the payroll tax that funds America’s 80-year-old pay-as-you-go social insurance program.

Buttigieg’s proposal, announced last Saturday at a forum in Iowa sponsored by AARP, is similar to but more moderate than similar proposals from Sen. Bernie Sanders (D-VT) and other Democratic presidential candidates.

The mayor of South Bend, Indiana, Buttigieg said he would raise the maximum annual earnings currently subject to the Social Security payroll tax to $250,000 from $132,900. Workers and employees pay a combined 12.4% tax on their earnings—6.2% each—up to an amount that rises annually with the average national wage.

“That would go a long way toward sustainability on the Social Security side,” Buttigieg said. Americans ages 65 and older are expected to comprise about 23% of the electorate in 2020. That’s their largest share since at least 1970, according to The Pew Research Center.

In February, Bernie Sanders introduced legislation that would continue to apply the 12.4% tax on earnings below the current limit and above $250,000. Three others running for the Democratic presidential nomination, Sen. Cory Booker (D-NJ), Sen. Kirsten gillibrand (D-NY) and Sen. Kamala Harris (D-CA) have proposed solutions to Social Security’s funding problems. Without additional revenue, the program will be able to pay only about 75% of its promised benefits starting in 2034.

Of ‘Thrillers, Spillers, and Fillers,’ Plus the Mueller Hearings

Posted on July 25, 2019 by Kerry Pechter -

My wife was re-arranging plants in a big pot on our deck the other day. She follows the rule of (green) thumb that every big pot needs a “filler, a spiller and a thriller.”

It means that an impressive pot needs a tall, conspicuous flower that catches your eye (thriller), a spreading plant that overflows the edges of the pot (spiller) and, underneath, a bunch of greenery (filler) that covers the dirt.

All long-lived ideas have three components, but this one seems like it applies especially well to retirement income portfolios. You need a solid foundation of guaranteed income, a chunk of medium-term growth, and something exciting or foolish that might pay off big, like cannabis stock, a 1967 Porsche Targa or a three-day trip to Las Vegas every winter.

Advisors know that metaphors and stories come in handy when talking to clients, and that different types of yarns (i.e., about golf or fly-fishing) are effective with different people. It’s not hard to imagine an advisor hearing a near-retiree say that he or she wants to spend more time in the garden.

If you casually mention the thriller/spiller/filler metaphor, well, it’s practically a done deal. If you’re such an expert on plants, the client will logically assume, you must be a genius on investing.

* * *

If you’re not a lawyer or haven’t watched many criminal trials, you wouldn’t have noticed that this week’s “Mueller hearings” followed the classic criminal trial format.

The Democrats were the prosecutors, the president was the defendant, the Republicans were his lawyers, and Mueller was the prosecution’s sole witness. Democratic representatives led Mueller methodically through his own evidence; they needed nothing more than for him to confirm what he had already written, which until then had been successfully obscured by AG William Barr.

On cross-examination, the Republicans used several classic techniques for defending guilty clients. When the facts are against you, you impugn the motives of the witness (Mueller conspired with Democrats), or challenge the law (“Exoneration isn’t in any law book”), or use the “fruit of a poison tree” defense (The case began with the unverified Steele dossier, so all sequelae is disqualified), or claim presumption of innocence, or say that your client was framed. They did all that.

The media may say “Mueller said nothing new.” He didn’t have to; he just had to confirm his findings. Mueller seemed bored with the petty deceptions of the president and his men, but he verged on anger that anyone would acquiesce to foreign meddling in a US election.

‘APIs’ and the Future of Annuities

Posted on July 25, 2019 by Kerry Pechter -

Anybody with a stake in the annuity business—as an advisor, distributor or manufacturer—needs to know at least a little about application programming interfaces, or APIs. Last week, RIJ reported on the June launch of Envestnet’s Insurance Exchange, whose seamless integrations of data and software depend on these interfaces. This week, we take a second (but non-technical) look at them.

By now we all use APIs almost every day, and certainly whenever we shop online. For example, a FedEx or UPS might add its API to an e-commerce site—a Land’s End or L.L. Bean platform, maybe—to facilitate “ordering shipping services and automatically include current shipping rates, without the site developer having to enter the shipper’s rate table into a web database.”

Catching up with the API technology train as fast as possible is essential for the survival of the annuity business. Any company that wants to do business on the web, that wants to “bolt-on” third-party services as easily as Lego blocks, and that wants to give customers the fluid experience they expect online, has to use APIs.

The worlds of advice and financial product distribution are clearly headed in this direction, and life insurance companies have to follow. Six annuity issuers—Allianz Life, Brighthouse Financial, Global Atlantic, Jackson National, Nationwide and Prudential—have already begun to integrate with the Insurance Exchange. Others are expected to join later this year.

Walther

“I was just talking about API technology with one of our major distribution partners,” Corey Walther, head of business development and distribution relationship management at Allianz Life said in an interview with RIJ. “We were joking that, a year or 18 months ago, that topic would never have come up, even at large organizations. But here was the president of a distribution firm initiating a conversation about APIs. It’s going to be a requirement in the future.”

They’re just like Lego blocks

Lego blocks and APIs, in fact, are often compared. With APIs, “developers don’t have to start from scratch every time they write a new program,” said an article at thenewstack.io. “They no longer have to build a core application that tries to do everything. Instead, they can contract out certain responsibilities by using already created pieces that do the job better. So APIs are the Lego bricks of software development: standardized tools for software to communicate with other software, leading to faster building and deployment… and faster load times.”

APIs are central to Envestnet’s cloud-based technology strategy. They’re the neurotransmitters that allow advisors to integrate insurance products and investment products on the same web page. They form a network that allows Envestnet to offer clients an á la carte menu of services instead of a prix fixe list. (For the “restaurant analogy” of APIs, click on image below.)

To build the Insurance Exchange, Envestnet first created FIDx, a stand-alone company in Berwyn, PA. FIDx builds bridges—integrations, in developer-speak—between software inside Envestnet and software tools from outside vendors. It often relies on the vendors’ existing APIs to make the connections. For instance, FIDx can integrate Envestnet’s MoneyGuidePro planning tool and Insurance Technologies’ annuity order-entry and illustration tools using Insurance Technologies’ FireLight Embedded API.

“Advisors won’t have to change the way they do business,” Rich Romano, the chief technology officer at FIDx, told RIJ. “Their businesses are enhanced. They can process annuities the same way they process their managed account businesses.”

For example, Riskalyze, the client financial risk assessment tool for advisors, has an API that allows it to integrate with Saleforce or Redfin, two customer relationship management software providers. Advisors can import client data from one to the other without cutting and pasting or re-entering anything. This technology, by now taken for granted in most of the e-commerce world, is relatively new to the annuity divisions of life insurers.

Thanks to APIs, annuity distributors and advisors can use the Insurance Exchange without necessarily abandoning any of their existing current technology partners. It means that advisors have more tools at their fingertips, so that they can more easily offer the comprehensive financial planning that clients want. At a mundane but important level, integration also reduces the cost of rework associated with NIGO (not in good order) annuity applications.

“The ‘north star’ for our vision is that advisors shouldn’t have to duplicate-entry anything,” said Walther at Allianz Life. “They should be able to go from proposal to implementation to monitoring, and it should all be tied together at the household level.”

Allianz Life’s partnership with Envestnet and FIDx “has never been just about selling fee-based annuities,” he told RIJ. “There’s a much bigger game that’s being played. It’s about the ability to bring ecosystems together more effectively. We’re taking asset management and insurance out of their silos.

“We can leverage tools like LifeYield, which shows people how to optimize their Social Security claiming decision and how best to take withdrawals from pre-tax accounts,” Walther added. “Or Riskalyze. We’re exploring integrations with BlackRock iRetire. Envestnet in effect becomes the Microsoft operating system. If you use a different CRM system or a different planning system, you can bolt those on.”

Ganguly

Dev Ganguly, the chief information officer at Jackson National, told RIJ, “We use FireLight as our ‘Intel Inside’ for order-entry and illustration. Those are Lego blocks that we outsource to FireLight. We have other Lego blocks for things like post-issue [services]. FIDx fits together our Lego blocks with Envestnet’s. APIs are the connectors between the blocks. Even today, not many insurance companies think about all the ways APIs approach. At Jackson we have taken the API approach.”

Green fields for insurers

“The carriers have two big boxes they want to check,” said John Yackel, leader of Strategic Initiatives at Envestnet. “First, they want to make their current business more efficient. And they’re telling us, ‘Get me into new markets that I haven’t gone after before.’” That would include the 15,000 advisors in the RIA channel who manage $1.2 trillion. “Annuities have only 3.3% penetration in that market,” he added, “so they look at it as a green field.”

“But it’s not just about fee-based business,” said Ganguly. “We look at ‘fee-based’ as a revenue model but we look at ‘advisory’ as a mindset. We’ll also leverage the power of the platform to do brokerage or commission-based business. The biggest benefit is the fact that two ecosystems, investments and insurance, are coming together. ”

Cetera, Allianz SE and Capital Group offer model retirement income portfolio tool

Posted on July 18, 2019 by Editorial Staff -

Cetera Financial Group, a network of broker-dealers, along with Allianz Life, Allianz Global Investors, PIMCO, and the Capital Group asset management firm have introduced SetIncome, a tool that “enables retirees to generate a reliable source of retirement income to last the rest of their lives,” the companies said in press release.

“These firms have come together to bring leading asset management and annuities solutions within a powerful technology platform to create better retirement outcomes and fill a critical gap in the marketplace, effectively disrupting the retirement income landscape,” Jacqueline Hunt, member of the board of Allianz SE, said in the release.

“Clients working with a Cetera-affiliated financial advisor can use SetIncome to create a retirement income plan with guaranteed fixed annuity and asset management models, which includes American Funds by Capital Group,” the release said.

SetIncome combines annuities and traditional asset management strategies, allowing financial advisors to “create an optimized income strategy for their clients in just five clicks of a button.”

Athene offers ‘Amplify,’ its first structured index annuity

Posted on July 18, 2019 by Kerry Pechter -

The latest entry into the fast-growing, highly concentrated, $12.3 billion-a-year structured index annuity market is “Amplify,” a new registered index-linked annuity contract (RILA, as structured index annuity are now called) from Athene. Amplify is the first RILA from Athene, which is the second-biggest seller of fixed index annuities (FIAs) after Allianz Life.

The commission-based insurance contract features terms (“segments”) of one year, two years, and six years. For downside protection, it offers either a 10% “floor,” where the owner absorbs the first 10% in index decline, or a 10% “buffer,” where the owner absorbs the net index decline beyond 10%, over each of those terms.

Amplify’s yields are linked to the performance of three popular index options (S&P500, Russell 2000 and MSCI-EAFE), or to a blend of those three. No hybrid (stock/bond) or exotic volatility-managed indices, which allow a narrower range of gain or loss than traditional all-equity indexes, are offered so far.

Amplify’s current caps on one-year credited interest range from 15.25% to 17% (for the buffer option) and from 13.5% to 15.5% (for the floor option), depending on the index chosen. In each case, the participation rate (the investor’s share of the gain up to the cap) is 100%. That’s more than double the upside potential offered by the typical FIA.

Two-year caps for the floor option range from 23% to 29%, depending on the index chosen. Caps do not apply to the two-year buffer option, which includes a participation rate of 115% on both the two-year MSCI EAFE index option and the six-year blended index option. All other participation rates are 100%.

For up-to-date rates, click here.

The annual expense ratio is 95 basis points (0.95%). Athene said it chose to make the expense ratio explicit rather than factoring it into its crediting rates. Implicit expenses would have reduced the crediting rates, and the products in this category compete largely by having the highest potential returns.

Athene said the same motivation drove its decision to offer the same 10% floor or buffer over the one-year, two-year, and six-year segments, even though a client’s downside risk exposure changes as the segments grow longer.

The RILA category—at least one broker-dealer executive strongly objects to the use of this opaque acronym—is aimed mainly at advisors of investors who want a tax-deferred accumulation vehicle with more upside potential than an FIA but more downside protection than a variable annuity.

Though RILAs are technically annuities (offered only by life insurers and convertible to a lifetime income), investors aren’t using them as such. RILAs rarely offer a guaranteed lifetime income rider; the expense of such a rider would add about another 1% of drag to the performance of RILAs and make them less competitive.

Asked if its new RILA might “cannibalize” Athene’s FIA sales, an Athene spokesperson said, “We feel that the products are complementary rather than overlapping. When you look at the sales trends, the momentum in RILAs isn’t happening at the expense of FIAs. The RILA might appeal to people with different risk appetites, or who are at different times in their lifecycle. It’s part of a continuum of products.”

Because this product is both commission-based and registered with the Securities and Exchange Commission, it will be distributed through the independent broker-dealer channel, which the SEC regulates through FINRA. Athene will also distribute the product through banks.

Insurance agents without securities licenses or broker-dealer affiliations (who traditionally sell the most FIAs) can’t sell it. Representatives of registered investment advisors (RIAs) who don’t take commissions (and charge asset-based fees) won’t be able to sell it either.

Different RILA issuers dominate in different distribution channels. AXA is the top-seller in the independent broker-dealer channel, where two-thirds of all RILA sales take place. It also sells its product through the 5,000 or so members of its career sales force, AXA Advisors. Its products are also sold in the bank channel and in the independent broker-dealer channel.

Overall the top five issuers of RILAs—AXA, Brighthouse, Allianz Life, Lincoln Financial, and CUNA Mutual—accounted for all but a smattering of sales in the first quarter of 2019, according to Wink’s Sales and Market Report.

Brighthouse’s Life Shield Level Select 6-Year product was the top-selling RILA overall in the first quarter of this year, and the top-seller in both the bank and independent broker-dealer channel. In the wirehouse channel, it had two of the three top-selling products—the Level Select 6-Year and the Level 10 contract.

T. Rowe Price Launches Retirement Payout Vehicle

Posted on July 18, 2019 by Kerry Pechter -

T. Rowe Price, one of the “big three” target date fund (TDF) providers, has introduced a payout vehicle that aims to deliver a non-guaranteed, 5% per year income stream to retirees from retirement plans that the Baltimore-based financial services firm administers.

The new product is the “Retirement 2020 Trust–Income,” a collective investment trust (CIT) that resembles T. Rowe Price’s Retirement 2020 TDF, but with an income feature for retirees.

“We had a plan sponsor come to us looking for a way to take a participant’s savings balance and create an income process,” said Michael Oler, vice president and Retirement Income Product Manager at T. Rowe Price. “They wanted to provide a solution that was liquid, that was easy to communicate to participants, and simple to monitor. The payout strategy checked a number of those boxes.”

T. Rowe Price did not disclose the name of the plan sponsor who requested the service. Generally speaking, a managed payout fund could be attractive for a defined contribution plan sponsor that has discontinued its defined benefit plan and whose employees are accustomed to having an income solution at retirement.

Oler

The money in the trust would still remain in the defined contribution plan. Some plan sponsors are said to want to keep large 401(k) accounts in the plan because they help maintain the size of the plan and the economies of scale that help keep overall plan costs down. Conserving small-balance clients would be counterproductive, given that they can cost more to maintain than they earn.

The Retirement 2020 Trust – Income was set up as a CIT because the client that requested it was a trust investor, a T. Rowe Price spokesperson said. But it will have the same “glide path,” or asset allocation that becomes more conservative over an investor’s lifetime, as its mutual fund twin. That glide path starts at about 90% stocks, starts falling 25 years prior to retirement and reaches about 55% stocks at the retirement date (presumably age 65). The stock allocation levels off at 20% of the portfolio 30 years after retirement.

The payout version of Retirement 2020, either as a CIT or a mutual fund, won’t be available to active participants in T. Rowe Price-administered retirement plans, only to former plan participants who have separated from service and are over age 59½ (the date from which there’s no federal tax penalty for withdrawals from qualified retirement accounts).

“We start communicating the availability of the payout option at age 55. It’s available to them but they can’t vest in it until they’re terminated. This gives them a few years to use the income calculator to determine how much income their savings can generate. Then we’ll have communications that go out to people who have been terminated and over 59 ½ reminding them of the service. Our call center staff will be trained on the product,” Oler said.

Through a web portal, T. Rowe Price will provide “an overview of the strategy, along with modeling capabilities to show how much monthly income could be generated by transferring a certain amount into the strategy, or conversely, how much they would need to transfer to receive a certain amount of monthly income. Product information will also be added to termination kits to remind participants about the availability of the strategy.”

Every September 30, the managers of the Retirement 2020 Trust will calculate the following year’s payout based on the trust’s average monthly net asset value over the previous 60 months. The 5% will be paid out in 12 monthly installments by direct deposit or check. If the recipients are over age 70½, the distributions will count toward their required minimum distributions. This distinguishes the product from a systematic withdrawal plan of a certain amount or certain percentage from a 401(k) account.

“It’s important to point out that Retirement 2020’s managed payout program is not a 5% withdrawal annually; rather, it pays 5% of the rolling 60-month NAV (net asset value),” T. Rowe Price said. “The significant difference is that the participant maintains the same number of shares as distributions are paid, where a withdrawal is the continuously reducing number of shares that will eventually deplete.”

As for the expense ratio, “Pricing for the Retirement Trusts vary depending on multiple factors, including, but not limited to, a plan’s eligibility to invest in the Retirement Trusts as well as total assets invested. Our pricing for plans eligible to invest in the Retirement Trusts begins at 46 basis points and decreases as a plan’s invested assets increase,” a T. Rowe Price spokesman told RIJ. There is no additional fee for the managed payout feature.

The investment is entirely liquid. Investors can buy or sell additional units in the trust at any time. According to the prospectus for the mutual fund TDF for 2020, “At the target date, the fund’s allocation to stocks is anticipated to be approximately 55% of its assets. The fund’s overall exposure to stocks will continue to decline until approximately 30 years after its target date, when its allocation to stocks will remain fixed at approximately 20% of its assets and the remainder will be invested in bonds.”

“It has the same glide path and the same fees as our other TDFs. Just as there are five-year vintages in the TDF, we expect to have five-year vintages in the managed payout funds,” Oler told RIJ.

“About 40% of the assets in our TDFs are in shorter-dated vintages, up to 2030, if you translate that to the overall TDF market, it’s about $1.8 trillion,” said Joe Martel, a T. Rowe Price target date fund portfolio specialist. “In terms of assets, that’s a meaningful market. The retirees who retire in the next 10 years are people who will have spent more years in defined contribution plans than current retirees. They’re used to the defined contribution model and to TDF investments.”

Vanguard introduced a managed payout mutual fund-of-funds about 10 years ago, and continues to offer such a fund. Its target payout is 4% per year. It has an expense ratio of 32 basis points per year (0.32%) and has an asset allocation of 53% stocks (including 24% Vanguard international stock index), 22.5% fixed income and 24% alternatives (including about 7% commodities). With a 4% payout, the fund runs a low risk of running to zero before the client dies (assuming a 30-year retirement).

Fidelity’s managed payout fund for people retiring in 2020 has evolved into a Fidelity Simplicity RMD 2020 Fund. It’s intended to be used in conjunction with the firm’s systematic withdrawal plan. The two can work together to ensure that clients distribute enough money from retirement accounts each year to fulfill their required minimum distributions. The expense ratio for that fund is 61 basis points (0.61%) per year.

These funds are useful in providing non-guaranteed income for retirees who are not “constrained;” that is, retirees who have adequate savings to last for a lifetime and who can afford to draw down an income from a liquid account that fluctuates with the market.

Retirees who need to squeeze the maximum income from a designated portion of their savings might be better off pooling their longevity risk with others in order to get a higher income yield.

For instance, a $300,000 purchase premium for an immediate annuity for a 70-year-old man would yield an income of $1,892 per month for life (with 10 years certain) or $1,747 per month for life (with cash refund). By contrast, the Vanguard fund would pay out about $1,000 per month and the T. Rowe Price Retirement 2020 Trust would pay out about $1,250. So keeping $300,000 liquid would cost a 70-year-old man at least $500 a month in income, or $60,000 over 10 years.

Honorable Mention

Posted on July 18, 2019 by Editorial Staff -

Fidelity, in pursuit of Vanguard, bolsters its index fund line-up

Fidelity Investments, which has followed the ongoing mass-investor trend toward passive investing and now manages more than $482 billion in index funds for clients, has launched five new index mutual funds (with ticker symbols and expense ratios):

Fidelity Mid Cap Growth Index Fund (FMDGX, 0.5%).

Fidelity Mid Cap Value Index Fund (FIMVX, 0.5%).

Fidelity Small Cap Growth Index Fund (FECGX, 0.5%).

Fidelity Small Cap Value Index Fund (FISVX, 0.5%).

Fidelity Municipal Bond Index Fund (FMBIX, 0.05%).

As with Fidelity’s 53 existing stock and bond index funds and 11 sector ETFs, “The new funds have lower expense ratios than their comparable funds at Vanguard,” said a Fidelity release, reflecting competition between the two prominent competitors in the retail and institutional investment markets. The five new funds are available to individual investors, third-party financial advisors and workplace retirement plans.

Fidelity’s launched a line of “ZERO” expense index funds last year, and its index funds feature expense ratios as low as 0.015%, or 1.5 basis points.

The index funds also carry no investment minimums for individual who invest directly with Fidelity or through a financial advisor. Fidelity is the financial industry’s second largest index mutual fund provider after Vanguard. The firm’s index mutual fund assets have increased 144% in the last three years and are now approaching $500 billion.

Subscription-based advice resonates with investors: Schwab

Since introducing new subscription-based pricing at the end of March 2019, Schwab Intelligent Portfolios Premium has added $1 billion in new assets under management, Charles Schwab reported this week.

The service has also seen a 25% increase in account opens, a 40% increase in average household assets enrolled, and a 37% rise in new-to-Schwab household enrollments. Overall client assets managed by Schwab’s digital advisory solutions total $41 billion, up 23% year-over-year, the company said in a release.

Schwab Intelligent Portfolios Premium offers unlimited one-on-one guidance from a Certified Financial Planner (CFP), access to the financial plan 24/7 via a comprehensive digital planning experience, and a diversified portfolio of low-cost exchange-traded funds (ETFs) that automatically rebalances over time.

In March, pricing for Schwab Intelligent Portfolios Premium was changed from an asset-based advisory fee to an initial one-time $300 fee for planning, and a $30 monthly subscription (advisory) fee ($90 billed quarterly) that does not change at higher asset levels.

Clients also pay the operating expenses on the ETFs in the portfolios, including Schwab ETFs. Based on a client’s risk profile, a portion of their portfolio is placed in an FDIC-insured deposit at Schwab Bank.

“Wealth” costs more than $1 million these days: Ameriprise

Only 13% of people who have one million dollars or more in investable assets consider themselves “wealthy,” according to Ameriprise Financial’s new Modern Money study, which surveyed more than 3,000 U.S. adults ages 30-69 with at least $100,000 in investable assets, including more than 700 millionaires.

About half (53%) of the investors surveyed know exactly how much they want or need to save or invest, while 43% have a detailed plan. Only four percent of respondents have no financial plan.

Millennials and Generation X investors focus on paying down debt. Baby Boomers cite protecting accumulated wealth as their second priority, reflecting the fact that many are in or nearing retirement. “They all cite saving for retirement as their top priority, regardless of where they fall on the age spectrum,” an Ameriprise release said.

About half (49%) of respondents believe their approach to making long-term investing decisions is different or very different from what they saw their parents do growing up, compared with 42% who say it’s similar or very similar.

With respect to how they make investment decisions: 46% say they do it themselves, 38% say they do it with someone else in their lives, and 9% say their spouses or partners do it. Half (51%) of respondents agree that aligning investments with personal values is more important today compared with 10 years ago.

Respondents commonly cite “the money a job pays” as the most important factor in choosing a career path. Flexibility and work-life balance rank second, followed by health and dental insurance and vacation time.

For more information about the study, go to Ameriprise.com/modernmoney.

Global Atlantic to educate advisors on income planning

To help retirees successfully transition from saving for retirement to dependable income they can rely on in retirement, Global Atlantic has launched a new “Income Ready” initiative. It features dedicated educational websites for financial advisors and consumers looking to learn more about developing a retirement income strategy.

GetIncomeReady.com, the consumer website, features educational resources for individuals who are planning for retirement. These features include videos, a retirement income needs calculator and sample stories to illustrate strategies.

The financial advisor website, IncomeReady.com, is designed to educate and prepare advisors to engage clients in income planning discussions. The website features educational materials including client income insight videos, an interactive experience that aims to dispel common annuity myths, and retirement case studies, as well as other resources advisors can use to support their client conversations. Advisors can also use the website to request a live Alliance for Lifetime Income workshop on the best ways to communicate with clients regarding retirement income needs.

Techniques Advisors Use to Generate Income for Retirement Clients

Posted on July 18, 2019 by No Author -

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Global Atlantic to educate advisors on income planning

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