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Protective pays $1.2bn for Great-West’s individual life and annuity business

Posted on June 6, 2019 by -

Protective Life Corp, a U.S. subsidiary of Dai-ichi Life Holdings, Inc. announced this week that its principal subsidiary, Protective Life Insurance Co., and Protective Life & Annuity Insurance Co., will acquire via reinsurance “substantially all” of Great-West Life & Annuity Insurance Co.’s individual life and annuity business.

The $1.2 billion transaction, announced last January 24, is Protective’s largest acquisition to date. The business being transferred, which has been marketed under the Great-West Financial brand, includes bank-owned and corporate-owned life insurance, single premium life insurance, individual annuities, and a portion of Great-West’s closed block life insurance and annuities. GWL&A is retaining a block of participating policies, which Protective will administer.

“This is the fourth acquisition completed since Protective became part of Dai-ichi in 2015. Dai-ichi considers Protective to be its North American growth platform and continues to aim for further expansion in the region, through both acquisitions and organic growth in Protective’s retail sales,” a Protective release said.

Morgan Stanley & Co. LLC acted as financial advisor to Protective for the transaction and Willkie Farr & Gallagher LLP acted as legal counsel.

© 2019 RIJ Publishing LLC. All rights reserved.

The Index Annuity Story, Part I

Posted on June 6, 2019 by -

At its heart, the fixed index annuity is a simple product. About 96% of premiums go into a life insurer’s general account, which earns about 4% a year. The rest is split between the cost of overhead and the cost of put and call options on the performance of an equity index or exchange-traded fund. Over the long run, FIAs can be expected to yield about two percentage points more per year than bonds.

But the indexed products themselves, and their distribution through insurance agents, brokerages and banks, and their regulatory controversies over the past quarter-century is much more complicated than that. Given the product’s rising success—and its record sales in 2018—we thought it was time for a close, sustained look at the FIA phenomenon.

Retirement Income Journal and Wink, Inc., the Des Moines-based independent life insurance and annuity market research firm, are recognizing FIA’s steady rise in sales with a four-week series of articles about them. Over the next month, we’ll look at the leading issuers of FIAs, at the mechanics of the products, and, finally, at their potential role, relative to other solutions, in Boomers’ retirement income strategies.

This week we’ll take a deep dive into the latest FIA sales numbers, as reported in Wink’s Sales & Market Report, 1st Quarter, 2019. The numbers show a new group of life insurers, relatively new to the FIA business, challenging the long-time leaders. On the distribution side, half of all sales still go through the insurance agent channel, but a big chunk of the flow has shifted to the brokerage and bank channels in recent years.

The FIA products themselves have gradually gotten a bit less flamboyant over the past two decades. Their design depends on the business model of the issuer, the channel through which they’re sold, and how that channel is regulated. Products for the big state-regulated agent pipeline tend to have longer surrender periods and a carnival of features. Products for brokerage and bank distribution, which come under federal supervision, tend to be a little more conservative in terms of compensation and surrender period.

Over the past few years, life insurers have been dangling no-commission FIAs (with more upside potential than commission products) in front of registered investment advisors (RIAs), hoping to break into that still-skeptical fee-based market. The future of the FIA industry may well depend on whether that foray is successful. (In two weeks, we’ll look under the hood at the design of the simplest as well as the most complex FIA contracts.)

Sales by life insurer

The FIA market has had remarkably stable leadership, with Allianz Life the consistent leader, followed by Athene (which leapfrogged to the first rank by buying Aviva in 2013), the AIG companies and American Equity Investment Life at the top of the leader board.

Led by Allianz Life (having purchased the FIA pioneer Life USA in 1999), which has held at least a 10% market share for 17 of the last 18 years, these four firms accounted for 36.7% of sales in 1Q2019. Just as the life insurance business overall is concentrated, so is the FIA business, with the top 10 companies (out of 68 FIA manufacturers) accounting for about two-thirds of sales.

Recently, however, the composition of the peloton behind them has changed, as major variable annuity (VA) issuers have shifted some of their production to FIAs. These include Nationwide, Pacific Life, and Lincoln National, which have climbed to the 5, 6, and 7 spots in sales. Great American, Midland National, and Fidelity & Guaranty appear to have moved down to make room for them. (Although still far behind the leaders, other VA veterans like Transamerica, Jackson National, and Prudential showed triple-digit sales growth in the first quarter of 2019 from the first quarter of 2018).

Overall, the FIA industry saw an 8% drop in first quarter 2019 sales (to $17.7 billion from a record $19.2 billion in 4Q2018), mainly because December’s flight to safety (in response to the Fed-inspired equity sell-off) ebbed in 1Q2019. But the past three quarters have been the three best in the history of FIAs. Last year also enjoyed a rebound from 2017 sales, when the threat of regulation by the Department of Labor temporarily chilled sales.

As noted above, however, the FIA market has grown in part because of retooling by VA manufacturers. The chart below shows that trend within the annuity market from VA sales to fixed annuity sales began long ago, in 2011. The overall annuity market has not been growing, despite Boomer aging.

“Are there agents who are registered reps who used to sell VAs but are now selling FIAs? Absolutely,” said Sheryl Moore, CEO of Wink, Inc. “That’s because the VAs were totally de-risked,” which took away much of their upside potential. “But I doubt that there’s a ton of 1035 transfers from FIAs,” she added, because many in-force VAs are too valuable to justify a transfer.

Sales by distribution channel

Until not long ago, the independent agent channel accounted for more than 90% of FIA sales. But the agent channel’s share has fallen to about 54%, in part because of regulation, as we’ll explain below. Much of its sales flow now passes through registered reps in independent brokerages (16.6%) and bank advisors (17.1%).

The wirehouse (also registered reps) and career agent have 5.9% and 6.6% of sales, respectively. The newest channel, which consists of online platforms that distribute no-commission FIAs and other insurance products to RIAs, is just getting started.

Some of the major FIA issuers, such as AIG, Lincoln National, American Equity, Pacific Life, sell across multiple channels. Others tend to specialize. While it also sells through banks, Athene sends most of its sales through (and currently leads) the independent agent channel, while Allianz Life is always a dominant factor, if not the leader, in both of the two largest channels (independent agents and broker-dealers). Global Atlantic (Forethought) focuses on the bank and wirehouse channels. MassMutual leads the career agent channel.

In the first quarter of 2019, AIG led in the bank channel, and was #2 or #3 in the independent broker/dealers, wirehouse and among career agents; it is not a leader, however, in the largest channel (independent agents).

Global Atlantic Financial Group (it owns Forethought, which acquired Hartford’s annuity business in 2013) leads the wirehouse (national full-service broker dealers) channel. Massachusetts Mutual leads in the career agent channel.

Regulatory pressures account for much of the shift in sales flow out of the independent agent channel to the independent broker-dealer channel. Many of the agents who sold FIAs also had securities licenses and were registered with broker-dealers. But they identified their FIA sales as “outside business activity” and didn’t submit the transactions to their broker-dealers for review and approval.

In 2007, the Securities & Exchange Commission tried to reclassify FIAs as securities, in what was seen by some in the insurance industry as a grab for FIA businesses by the brokerages. The SEC failed in its attempt, but brokerages began insisting on reviewing FIA sales. As a result, the amount of flow reported through the agent channel began to be reported through the independent brokerage channel.

“Independent broker-dealer sales of FIAs have gone from zero to 17%,” said Jeremy Alexander, CEO of Beacon Research, an annuity data aggregator. “That’s the regulatory impact. It may be that the same guys are selling FIAs, except now they’re selling them through the IBD channel instead of through their FMO.”

“Most independent broker-dealers are taking FIA sales through the grid,” said Moore. “But I wouldn’t say that there’s no absolute growth in the FIA market. The percentage of total sales through the independent B/D channel is growing, but so is the absolute dollar amount. The whole pie is growing.”

Sales by product

The five best-selling FIAs in the first quarter of 2019 were the Allianz 222 Annuity; the Nationwide New Heights 9; Forethought Life’s ForeAccumulation II FIA 5-Year 4, the American Equity IncomeShield 10; and the Allianz Core Income 7 Annuity.

The Allianz 222, a big, all-in-one product with tempting bonuses and a built-in (non-optional) rider that provide lifetime income ten years after purchase, is the leading product in the independent agent and the independent broker/dealer channels. Two other Allianz Life products were among the top ten sellers in the independent broker/dealer channel: Allianz Core Income 7 and Allianz 360.

ForeAccumulation II 5-year (the #3 seller overall) was the top seller in the bank and wirehouse channels. The 7-year version of the product was among the top ten best-selling products in both of those channels. The C.M. Life Index Horizons contract, which is issued and distributed by MassMutual was the most popular product in the career agent channel.

Consumers will see different types of products in different distribution channels. In the independent agent channel, products with 10-year surrender periods dominate. That’s partly because competition in those spaces demands (and mild state regulation allows) products with high incentives for agents and alluring premium bonuses. Ten-year deferral periods give the insurers time to cover the costs of commissions and bonuses.

It’s precisely those products, with their complex designs, overwhelming number of choices, sensational claims and long waiting-periods for benefits that may never fully materialize, that drew the attention of regulators. And that’s why FIAs sold through banks and broker-dealers are more likely to have five-year to seven-year terms, which are considered more client-friendly.

Conclusion

Regulation may be shaping FIA product design and distribution channels, but consumer demand for FIAs ultimately depends on two factors outside of the control of both the life insurers and the agents or advisors: Interest rates and stock market volatility.

Historically low interest rates, beginning with the plunge in the Fed funds rate to 1% in 2003 and back to almost zero in 2008, foster the sale of FIAs because the insurers’ long-date assets out-yield money market funds and certificates of deposits. At the same time, tremors in the equity markets send investors in search of low-risk or guaranteed assets.

Boomer retirement, and the mountain of savings that it entails, has helped drive the purchase of all kinds of financial assets. But it does not seem to have delivered the bonanza that the annuity industry once anticipated. That may disappoint distributors, but it’s not clear if the life insurance companies disturbed by that or not.

The leaders of the industry may have acquired as much risk as they want right now. “It’s not like there’s not enough demand,” said Alexander, who points to the annuity sales plateau of about $220 billion a year. “It’s not like the carriers are saying, ‘How can we break $240 billion?’ The carriers know how much they will sell and they have levers to control it.”

Next week: A closer look at Allianz Life, the perennial leader of the FIA space.

© 2019 RIJ Publishing LLC. All rights reserved.

 

A New Flavor of Variable Indexed Annuity

Posted on June 6, 2019 by -

 

Acting on a product design idea suggested by a Raymond James brokerage executive, Great American Life has launched a registered structured variable index annuity contract where the issuer splits any index losses 50-50 with the contract owner and uses the extra risk budget to boost caps and participation rates.

The new six-year product, the Index Summit 6, will be distributed through banks and independent broker-dealers by securities-registered advisors. Great American is currently the third biggest seller in each of those channels, according to Wink, Inc.

Distribution will not be exclusive to Raymond James and Raymond James has no proprietary claim on the product, executives at both companies told RIJ this week.

“Raymond James saw an opportunity in the marketplace, as we did in reviewing their analysis. The participation structure on both the downside and the upside is new to the marketplace,” said Joe Maringer, national sales vice president for Cincinnati-based Great American, in an interview.

The product offers crediting formulas linked to the S&P500 Index, the iShares MSCI EAFE exchange traded fund (ETF), and the iShares US Real Estate ETF through options. (In the second two choices, Great American uses options on the performances of the ETFs themselves, not on the performance of the indices they track.)

To achieve the strategy, “we sell a put and buy a call. That gives you a bigger lift from the index strategies,” Maringer added. The product has caps and participation rates on upside performance. Those will be reset every two weeks in response to changes in volatility and interest rates.

For the S&P500 Index, there are two crediting periods (at the end of which, interest is credited to the client and locked in), one-year and two-year. For each of those crediting periods, there’s a choice of cap rates (the most interest the contract owner can earn in a single term) or participation rates (the percentage of the positive index return to which the contract owner is entitled). There are one-year and two-year participation rates on the two ETFs, but no caps. There are slightly more generous sets of rates for premiums over $100,000 than under $100,000.

Since the contract owner accepts half of the downside risk, the insurer can offer attractive crediting rates. For premiums under $100,000, the current cap on the S&P500 is 10% for one-year terms and 18% for two-year terms. The participation rates on the S&P500 are currently 80% for both terms. There’s also a fixed rate option, with current rates of 1.85% (over $100,000 premium) and 1.75% (under $100,000).

On the other two indexes, participation rates vary from 95% to 120%, depending on the crediting period and the premium value. Regardless of the crediting period, the client commits to holding the product for six years or paying a surrender penalty for withdrawals of more than 10% of the account value of the contract.

“GAIG [Great American Insurance Group] believes in keeping things simple, Maringer said. “There are no contract fees, no mortality and expense risk fees, no subaccounts and a return-of-principal death benefit. You need a security license to sell it and it can only be sold through a broker-dealer contract with Great American.”

“You can write this concept out on a cocktail napkin, and ask someone, ‘Are you comfortable with half the downside and more of the upside?’,” said Thomas Layton, vice president of product management for Raymond James. Great American solicited ideas for new products from Raymond James, and Layton, a specialist in alternatives and structured products, came up with this one.

“The same concept has been used in the ETF space, where a common structure has been, ‘You get 130% of the upside and 30% of the downside.’ My background is in alternatives, so I’m familiar with the less common, more structurally sophisticated concepts,” Layton added.

Raymond James was looking for another six-year variable index product that would fit in with the six-year structured variable index products already on its shelf, one that would offer something new while having the same compensation levels so that advisors could make unconflicted recommendations among similar products, Layton told RIJ.

“Our top sellers tend to be seven-year or five-year products. Index Summit at six years was targeted to align with other providers in this market,” Maringer said. “AXA, Allianz Life and Brighthouse, the three core tenured providers, all have six-year products at brokerages. We’re new to the index variable annuity market. We’ve only been doing this for about 15 months.”

Other structured variable index annuity contracts have generally offered downside buffers (where the insurer might absorb any index loss up to five percent or 10%) or downside floors (where the insurer absorbs any index loss in excess of five percent or 10%). These structures distinguish them from conventional fixed index annuities, which can insure the contract owner from any index loss.

Like other variable index annuities, the Index Summit 6 is an accumulation-oriented product with no optional or built-in income rider. “With the first generation of the product we wanted to focus on accumulation. If simplicity is important, you don’t want to layer on an income rider to a product that’s already complex. You can always annuitize it, though that option is seldom used,” Maringer said.

Great American has simulated the performance of the Index Summit 6 (linked to the S&P500 and with a participation rate of 75%) over hundreds of one-year periods between 2001 and 2018 and found that it would have produced average one-year returns of 6.78%, with a high of 51% and a low of -24%. For the bull market years of 2009 to 2018 (inclusive), the same contract would have produced an average annual return of 8.62%, according to Great American documents.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on June 6, 2019 by -

Bank of America offers new hybrid advice model

Bank of America has launched a hybrid human/digital advisory service that merges access to a Merrill Financial Solutions Advisor to users of Merrill Guided Investing, an online investment advice platform, the bank said in a release this week.

The new service is called, “Merrill Guided Investing with an advisor.” It “expands the continuum of services that Merrill offers to investors,” a Bank of America spokesperson told RIJ.” Merrill Edge Self Directed, Merrill Guided Investing, the new Merrill Guided Investing with an advisor, and Merrill Lynch Wealth Management are all part of the continuum and of the Merrill umbrella. Our goal is to serve investors at every stage of wealth accumulation.”

Clients of the new service will work with a Merrill advisor to identify priorities, define financial goals, and track progress toward those goals. Costs and benefits of the hybrid program include:

  • Access to 25 investment strategies built and managed by Merrill’s Chief Investment Office (CIO). Only 15 strategies are offered through the digital-only version of Merrill Guided Investing.
  • A minimum initial deposit of $20,000. The account minimum for Merrill Guided Investing is $5,000.
  • An annual service fee of 0.85%, plus fund expenses, compared to 0.45% for Merrill Guided Investing.

The hybrid services will be offered through FSAs in Bank of America financial centers, Merrill Advisory Centers, and Merrill offices in the U.S. In April, the company announced plans to hire over 300 FSAs to be located in Merrill offices this year, adding to the 2,700 FSAs currently on staff. Clients with more assets will be referred to one of Merrill Lynch Wealth Management’s nearly 15,000 financial advisors.

Clients of the Merrill Guided Investing offerings are eligible for an annual program fee discount of up to 0.15% if they are members of Bank of America’s Preferred Rewards program.

Launched in February 2017, Merrill Guided Investing was enhanced in March 2019 with features that allow clients to create financial plans based on all their assets. Late last year, the service added “impact portfolios” as an investment option so that clients could align investments with their values. Since then, 20% of new clients have selected that option.

Combined client balances for the company’s guided investing and self-directed platforms were about $211 billion on March 31, 2019.

Fidelity adds 150 new ETFs to its no-load ETF supermarket

Fidelity Investments, the $7.6 trillion, family-owned Boston-based financial services giant, said this week that it will add nearly 150 exchange-traded funds (ETFs) from 11 ETF manufacturers to its menu of proprietary ETFs and hundreds of BlackRock iShare funds.

Fidelity now offers more than 500 high-quality ETFs for online purchase with no sales commission through some 28 million brokerage accounts at Fidelity. The new ETF manufacturers include: American Century, First Trust, Franklin Templeton, Goldman Sachs Asset Management, Invesco, Janus Henderson, John Hancock Investments, J.P. Morgan Asset Management, Legg Mason Global Asset Management, PIMCO and State Street Global Advisors SPDR ETFs.

The ETFs in the lineup have an average expense ratio of 0.36% and represent 69 Morningstar categories. Industry assets under management in Fidelity’s available commission-free ETFs account for 40% of the overall U.S. ETF market, and Fidelity has more than $450 billion in ETF client assets under administration, the release said.

The free-commission offer applies only to online purchases of select ETFs in a Fidelity brokerage account. The sale of ETFs is subject to an activity assessment fee (from $0.01 to $0.03 per $1,000 of principal).

The Fidelity ZERO Total Market Index Fund (FZROX), Fidelity ZERO International Index Fund (FZILX), Fidelity ZERO Large Cap Index Fund (FNILX), and Fidelity ZERO Extended Market Index Fund (FZIPX) are now available to individual retail investors who purchase their shares through a Fidelity brokerage account.

Pacific Life taps Salesforce for CRM services

Pacific Life has selected Salesforce, the customer relationship management (CRM) software firm, as one of its strategic technology partners “to get a 360-degree customer view and deliver seamless and integrated experiences across its entire U.S. retail businesses,” Salesforce announced this week.

More specifically, Pacific Life partnered with Salesforce on “the NextGen CRM Program,” which is designed to bridge the gap between Pacific Life’s sales, service and marketing teams and “reimagine how they engage with financial professionals.”

Pacific Life is deploying Salesforce as its enterprise-wide, integrated CRM platform to streamline customer engagement and connect with customers through traditional call centers or through digital channels such as email, social chat and text.

Pacific Life is also “tapping into an ecosystem of distribution partners using APIs” or application programming interfaces. A network of reusable APIs will enable Pacific Life to integrate with digital platforms like Blueprint Income.

Pacific Life will use Salesforce’s Financial Services Cloud, Einstein Analytics, Einstein Data Discovery, Marketing Cloud, MuleSoft, Quip, the Salesforce Lightning Platform and Success Cloud advisory services.

RetireUp can now model Great American annuities

Retirement income planning software provider RetireUp announced this week that it will add Great American Life’s fixed-indexed annuities (FIAs) to the lineup of modeled products available on its client-advisor platform, RetireUp Pro.

The Great American contracts include the American Landmark 5, American Legend 7, AssuranceSelect 5 Plus, AssuranceSelect 7 Plus, Premier Bonus and Premier Income Bonus.

The RetireUp Pro platform enables advisors to model insurance products within a client’s portfolio, allowing them to demonstrate the potential benefits of adding an annuity to a retirement plan.

Dynamic Wealth Advisors to use RetireOne’s RIA insurance platform

RetireOne, the no-commission annuity sales platform, has agreed to provide insurance and annuity back office services for clients of Dynamic Wealth Advisors, a turnkey wealth management platform for fee-based registered investment advisors (RIAs), the firms said in a release this week.

Under the agreement, RetireOne will provide an online platform for the purchase of no-load insurance and annuity products, along with distribution, education, and ongoing support services through RetireOne’s Advisor Solutions Desk.

“This is significant for our wealth managers who develop holistic financial plans incorporating solutions that optimize tax efficiency, and manage longevity risk, sequence of returns risk, and other risks,” said Dynamic Wealth Advisors COO, Craig Morningstar, in the release.

A part of Aria Retirement Solutions, RetireOne provides over 900 RIAs and fee-based advisors access to fee-based insurance products from multiple A-rated companies through its independent online platform. Dynamic Wealth Advisors produces myVirtualPractice, a virtual office and wealth management practice with staff, back/middle office, accounting/billing, compliance services and a Virtual Assistant.

Lincoln to expand broker education, use Goldman Sachs securities lending service

Lincoln Financial Group has launched a Broker Development Institute to further enhance its broker education and training program, which includes Continuing Education and non-CE courses. The Institute is a two-day educational event, including best practices, case studies and industry trends on a particular industry topic or trend.

The first Broker Development Institute took place on April 23 in Atlanta, Ga., and was focused on the employee leave landscape and absence management trends, a Lincoln release said. The Institute will continue throughout the country this year, and will expand to include other market topics.

Lincoln’s group benefits business offers employee benefits products and solutions, including disability and leave management, as well as life, dental, accident, critical illness and vision insurance coverages.

In other news, Lincoln Financial Network (LFN), the retail wealth management affiliate of Lincoln Financial Group, agreed to offer the Goldman Sachs Private Bank Select securities-based lending solution to LFN advisors and their clients.

GS Select is an online loan origination and servicing program that combines digital technology with personalized support to provide clients access to liquidity for tuition, home purchases and renovations, bridge financing and start-up funding. GS Select uses diversified, non-retirement investment assets in a client’s pledged account as collateral.

© 2019 RIJ Publishing LLC. All rights reserved.

U.S. life/annuity insurers see higher net income in 1Q2019

Posted on June 6, 2019 by -

The U.S. life/annuity (L/A) industry’s net income in the first quarter of 2019 rose sharply over the prior-year period, to $14.9 billion from $3.2 billion, due mainly to a significant decline in total expenses, according to A.M. Best, the ratings agency.

Those preliminary financial results are detailed in a new Best’s Special Report, titled, “First Look – Three Month 2019 Life/Annuity Financial Results.” The data comes from companies’ three-month 2019 interim period statutory statements, which were received by May 29, 2019 and represent an estimated 93% of total industry premiums and annuity considerations.

The L/A industry’s total income for the first three months of 2019 declined slightly by 1.3% from the prior-year period, as net investment income remained unchanged and a $37.7 billion increase in premiums and annuity considerations was negated by a $40.7 billion decline in other income, the report said.

However, a $12.8 billion decrease in incurred benefits, coupled with a $9.8 billion reduction in general insurance and other expenses, and an $8.5 billion reduction in net transfers to separate accounts drove a $13.6 billion reduction in total expenses.

Despite relatively flat income, the decline in expenses resulted in pre-tax net operating gain doubling from the prior-year period to $21.9 billion. A $2.0 billion increase in federal and foreign taxes was offset by a $2.8 billion reduction in net realized capital losses, boosting the total industry’s net income.

© 2019 RIJ Publishing LLC.

Honorable Mention

Posted on May 30, 2019 by -

Generational views of retirement differ: TIAA

The one-in-four Americans (27%) who lack confidence in their parents’ financial security in retirement are likely to lack confidence in their own retirement security, according to a new survey from TIAA. They are half as likely to feel confident about their own retirement as people who are confident in their parents’ retirement (36% vs. 72%).

More than half of respondents (57%) said that their parents’ financial planning for retirement affected their own. Almost half (44%) avoiding taking on significant debt, and 38% said they spend more conservatively and limit their spending on non-essentials.

The TIAA survey shows that Generation X and baby boomers are significantly less optimistic than Millennials about their parents’ financial outlook. Just over one-third of Gen X adults (35%) and only one in four baby boomers (26%) described their parents’ financial outlook as very good or excellent, compared to more than half (52%) of Millennials.

Only 47% of Gen X and 34% of baby boomers say they are confident in their parents’ current or future financial security, compared to 60% of Millennials. While nearly four in ten Gen X (39%) and baby boomers (35%) don’t find their parents’ approach to saving and investing to be “admirable and one to emulate,” only 25% of Millennials don’t.

Among the one-in-five adults who are confident in their retired parents’ long-term financial security, 21% indicate that they have some or a lot of concern about their parents running out of money during retirement.

People may overestimate their parents’ preparedness for retirement. Seven in ten Millennials rate their parents’ financial outlook as good to excellent (72%). But among the Gen X and boomers who are the same age as Millennials’ parents, only 57% and 58%, respectively, rate their own financial outlook as good to excellent.

KRC Research conducted the online survey from February 19-21, 2019 of 1,003 adults, ages 18 and older living in the United States. Results have been weighted to be demographically representative of the U.S. population based on age, sex, geographic region, race and education.

Stress on the ‘Bank of Mom and Dad’

Of the $41 billion lent by the Bank of Mom and Dad to help younger generations buy a first home in the US in 2018, 54% came out of their retirement savings, according to new research sponsored by Legal & General Group.

The recently released study found that 29% of U.S. parents and grandparents surveyed have provided financial assistance to children and grandchildren purchasing property. However, 15% believe they are financially worse off as a result; and 14% also said they feel their financial future is less secure.

In addition, seven percent of these Bank-of-Mom-and-Dad lenders postponed retirement after helping family or friends get onto the housing ladder, 39% of these by more than three years.

The number of ‘lenders’ accepting a lower standard of living was higher among those in the Mid-Atlantic states, with over a quarter of respondents from this region also feeling less financially secure. Despite this, BoMaD lenders still help younger family members navigate the property market with savings or, as 15% of respondents reported, taking out loans to do so.

Other sources of funding that BoMaD lenders have used, or would consider using to assist family members, include raiding either their IRAs or their 401(k)s (8% each). Seven percent refinanced their homes, and 6% downsized to a smaller property themselves. Five percent came out of retirement to help their kids toward a lifestyle they may have come to expect growing up in the relatively greater affluence of previous decades.

The BoMaD study also found that lenders—operating on an emotional basis—were unlikely to take professional advice when helping their kids and grandkids financially. Before gifting or loaning the money, nearly half of respondents (48%) didn’t or wouldn’t seek any professional advice about their choices.

“Whatever the source of funds, only a quarter of BoMaD lenders sought advice before they helped their kids financially. That number is surprisingly low—as an industry, we should encourage more people to seek advice to make sure helping younger family members won’t leave them short of money in later life or concerned about their own financial future,” L&G’s Nigel Wilson noted.

© 2019 RIJ Publishing LLC. All rights reserved.

 

Auto-enrollees don’t ‘borrow to save,’ researchers say

Posted on May 30, 2019 by -

Middle- and low-income American workers often say that they can’t afford to save, so questions have arisen about the effects of auto-enrolling them into defined contribution and defaulting them into saving 3% or more of their pre-tax pay.

Would they reduce their spending by 3% to offset the new savings? Or would they maintain the same standard of living by borrowing money through credit cards, home equity loans or other forms of credit? In other words, could auto-enrollment leave certain people worse off than they were without it?

A group of Ivy League university researchers has been studying the savings and borrowing habits of a group of participants in the federal Thrift Savings Plan (TSP) workers for several years, in hopes of answering those questions. Their most recent report shows “that automatic enrollment has no impact on the probability of financial distress.”

The authors took advantage of a natural experiment, made possible by the adoption of auto-enrollment in the TSP program for civilian employees of the U.S. Army in 2010. They compared the savings and debt outcomes of participants hired in the year before the inception of auto-enrollment with the outcomes of participants hired in the first year of auto-enrollment. The participants’ average annual salary was about $55,000.

“Automatic enrollment in the TSP at a 3% of income default contribution rate is successful at increasing contributions to the TSP,” the authors write. “At 43-48 months of tenure, this policy raises cumulative contributions to the TSP by 4.1% of first-year annualized salary. We find that little of this accumulation is offset by increased debt excluding first mortgages and auto debt, and there is no impact on credit scores or debt in third-party collections.”

The paper, “Borrowing to Save? The Impact of Auto-Enrollment on Debt,” was written by John Beshears (Harvard Business School), James J. Choi (Yale School of Management), Brigitte C. Madrian (Brigham Young University), David Laibson (Harvard), and William L. Skimmyhorn (College of William & Mary).

These new results update the results reported in an October 2016 version of the same paper. At that time, they wrote, “Automatic enrollment in the TSP at a 3% of income default contribution rate is extremely successful at increasing contributions to the TSP at the left tail of the distribution while leaving the middle and right of the distribution unchanged.” By “left tail,” they meant lower-income participants.

“At four years of tenure,” they added, “this policy raises cumulative contributions to the TSP as a percent of first-year annualized income by 5.2% at the mean, 13.9% at the 25th percentile, and 21.5% at the 10th percentile. However, once crowd-out along debt margins is considered, the effect of automatic enrollment is considerably more modest.”

© 2019 RIJ Publishing LLC. All rights reserved.

 

Modern Monetary Inevitabilities

Posted on May 30, 2019 by -

In a recent Project Syndicate commentary, James K. Galbraith of the University of Texas at Austin defends Modern Monetary Theory and corrects some misunderstandings about the relationships among MMT, federal deficits, and central-bank independence. But Galbraith does not explore what is perhaps the most important issue of all: the political conditions needed to implement MMT effectively.
MMT owes its newfound relevance to the fact that deflation, rather than inflation, is becoming central banks’ main concern. For a high-debt, high-deficit economy like the United States, deflation is an especially serious threat, because it delays consumption and increases debtor anxiety. Consumers forego major purchases on the assumption that future prices will be lower. Homeowners with mortgages cut back their spending when they see home prices falling and the equity in their homes declining. These cutbacks worry the Federal Reserve, because they add to deflationary pressures and could trigger deeper spending cuts, stock-market declines, and widespread deleveraging.

The Fed’s inability so far to reach its 2% target for annual inflation suggests that it lacks the means to overcome persistent disinflationary forces in the economy. These forces include increased US market concentration, which diminishes aggregate demand by weakening employee bargaining power and increasing income inequality; population aging; inadequate investment in infrastructure and climate- change abatement; and technology-driven labor displacement.

Making matters worse, US political gridlock assures continued commitment to economically exhausted strategies such as tax cuts for the rich, at the expense of investment in education and other sources of long-term growth. These conditions cry out for significant changes in US government spending and tax policies.

MMT is seen as a way to accomplish the needed changes. It holds that a government can spend as much as it wants if it borrows in its own currency and its central bank can buy as much of the government’s debt as necessary—as long as doing so doesn’t generate unacceptably high inflation. Both tax-cut advocates and supporters of public investment find little not to like.

MMT has been roundly criticized by economists across the political spectrum, from Kenneth Rogoff and Lawrence H. Summers of Harvard University to Paul Krugman of the City University of New York. All contend that it is a political argument masquerading as economic theory. But Galbraith and Ray Dalio of Bridgewater Associates see MMT differently. Dalio argues that MMT is real and, more to the point, it is an inevitable policy step in historically recurring debt-cycle downturns.

In his book Principles for Navigating Big Debt Crises, Dalio documents the steps that central banks have historically taken when faced with a booming economy that suddenly crumples under the weight of debt. The first step (Monetary Policy 1, or MP1) is to cut overnight official rates to stimulate credit and investment expansion. The second (MP2) is to buy government debt (quantitative easing) to support asset prices and prevent uncontrollable waves of deleveraging. If MP1 and MP2 are insufficient to halt a downturn, central banks take step three (MMT, which Dalio calls MP3) and proceed to finance the spending priorities that political leaders deem most essential. The priorities can range from financing major national projects to “helicopter money” transfers directly to consumers.

Achieving political agreement on what to finance and how is essential for implementing MP3 effectively. In a financial meltdown or other national emergency, political unity and prompt action are essential. Unity requires a strong consensus on what should be financed. Speed requires the existence of a trusted institution to direct the spending.

In the early 1940s, when the US entered World War II and winning the war became the government’s top priority, the Fed entered full MP3 mode. It not only set short- and long-term rates for Treasury bonds, but also bought as much government debt as necessary to finance the war effort. MP3 was possible because the war united the country politically and gave the Roosevelt administration near-authoritarian rule over the economy.

The core weakness of MP3/MMT advocacy is the absence of an explanation of how to achieve political unity on what to finance and how. This absence is inexcusable. Total US debt (as a share of GDP) is approaching levels associated with past financial meltdowns, and that doesn’t even account for the hidden debts associated with infrastructure maintenance, rising sea levels, and unfunded pensions. For the reasons Dalio lays out, a US debt crisis requiring some form of MP3 is all but inevitable.

The crucial question that any effort to achieve political unity must answer is what constitutes justifiable spending. Alexander Hamilton, America’s first Secretary of the Treasury, offered an answer in 1781: “A national debt,” he wrote, “if it is not excessive will be to us a national blessing.” A government’s debt is “excessive” if it cannot be repaid because its proceeds were spent in ways that did not increase national wealth enough to do so. Debt resulting from tax cuts that are spent on mega-yachts would almost certainly be excessive; debt incurred to improve educational outcomes, maintain essential infrastructure, or address climate change would probably not be. Accordingly, it will be easier to achieve political unity if MP3 proceeds are spent on priorities such as education, infrastructure, or climate.

The political test for justifying MP3-financed government spending, is clear: Will future generations judge that the borrowing was not “excessive”? Most Americans born well after WWII would say that the debt incurred to win that war was justified, as was the debt that financed the construction of the Interstate Highway System, which literally paved the way for stronger growth.

As the 1930s and 1940s show, MP3 is a natural component of government responses to major debt downturns and the political crises they trigger. We know much more about what contributes to economic growth and sustainability than we did in the first half of the twentieth century. To speed recovery from the next downturn, we need to identify now the types of spending that will contribute most to sustainable recovery and that in hindsight will be viewed as most justified by future Americans. We need also to design the institutions that will direct the spending. These are the keys to building the political unity that MMT requires. To know what to finance and how, future Americans can show us the way; we need only put ourselves in their shoes.

© 2019 Project Syndicate.

Is the SECURE Act Too Weak to Make a Difference?

Posted on May 30, 2019 by -

Life insurance and investment company trade groups are treating the expected passage of a retirement reform bill (based on the SECURE Act that recently passed in the House and the Retirement Enhancement and Savings Act awaiting a vote in the Senate) like the greatest thing since the repeal of Prohibition. Others don’t think the legislation will change much.

It’s true that the anticipated bill strikes at bottlenecks in the 401(k) system. The new legislation will make it less risky, legally, for plan sponsors to add annuities as plan options; it will promote savings adequacy by raising the limits of “auto-escalation”; and it will address the plan coverage gap among small firms by allowing them to join “open multiple-employer plans.”

But the bills feel like a batch of random measures, not like a clear public policy directive. They appear to reflect the interests of the sellers of retirement plan services more than the interests of the buyers of those services. Lawmakers don’t appear to have haggled for measures that would spark demand for annuities—perhaps by giving in-plan annuities unique advantages.

The possibility also exists that the bills, like other deregulatory moves, won’t be harmless. Like the Commodity Futures Modernization Act of 2000 (which deregulated derivatives), and the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (which denied relief of student loan burdens through bankruptcy), they might create loopholes that lead to adverse unintended consequences.

For instance, both bills allow plan sponsors to rely on state insurance commission filings and communications to satisfy their fiduciary duties when conducting due diligence on annuity providers. And, under the bills, a life insurer need be in existence for only seven years in order to qualify for consideration.

I asked two pension law experts about this. Neither one seemed to think that the bills would have much effect either way.

“One of the criticisms of SECURE is that some states are less rigorous in their oversight of insurance companies and, as a result, some weaker insurance companies will be able to qualify under the bill’s ‘checklist’ approach,” pension law expert Fred Reish at the law firm Drinker Biddle & Reath told RIJ.

“While that’s a possibility, I doubt that it will happen because the plan fiduciaries must still decide whether to include the annuities or GMWBs [guaranteed minimum withdrawal benefits] in their plans,” Reish said. “So far, at least, the 401(k) recordkeepers, who by and large, determine who is on their platforms, have only used large, financially strong insurance companies… usually the insurance company affiliated with the recordkeeper. I don’t see the recordkeepers allowing weak insurance companies on their platforms.”

Attorney Marcia Wagner of the Wagner Law Group agreed. She told RIJ, “[While] weaker insurers may make a pitch to small employers, they would still need to be sufficiently qualified to be considered under an RFP [request for proposal], and they may have difficulty in satisfying that hurdle.

“As with other service provider decisions, lowest cost is not the decisive factor, and even though [weaker insurers] may qualify, the likelihood is that the plan sponsor will feel more comfortable dealing with a more established insurer. As to whether the SECURE Act sets the bar too low, while insurance companies do fail, the proposal is dealing with an area in which there is a low level of risk.”

Employers will still have to behave like fiduciaries, and that’s still not going to be cheap. One 401(k) provider executive told RIJ that it’s still going to cost employers about $50,000 to hire a consultant to guide them through the annuity provider selection process, and that such an expense will be out of reach for most small firms.

Regarding the type of annuities that can be offered in 401(k) plans, the bills also appear to be intentionally open-ended. According to the text of the SECURE Act:

“The term ‘guaranteed retirement income contract’ means an annuity contract for a fixed term or a contract (or provision or feature thereof) which provides guaranteed benefits annually (or more frequently) for at least the remainder of the life of the participant or the joint lives of the participant and the participant’s designated beneficiary as part of an individual account plan.”

Unlike a 2015 Department of Labor bulletin on this topic, the bills don’t point to immediate or deferred income annuities as the preferred types of annuities for plan participants. The bills don’t give employers any direction about choosing a type of income-generating annuity, even though vastly different products can call themselves “annuities.”

One employer might choose to offer only a deferred annuity with a guaranteed lifetime withdrawal benefit with full liquidity and little or no mortality pooling benefit, while another employer might choose a deferred income annuity that pays nothing until the participant dies or reaches age 80. But are they all in the best interest of the participant?

The retirement industry took the lead in shaping these bills; it has the strongest incentives to liberalize the in-plan annuity market, so taking the lead makes perfect sense. But the bills curiously lack stimulants for the demand side. Democratic lawmakers in particular could have insisted on concessions from life insurers or on legal changes that might make in-plan annuities much more appealing to workers. That might have disrupted the bipartisan appeal of the bill, but it might have made it more effective.

“It is unclear the extent to which there will be a take-up of annuities if this provision becomes law. First, an annuity form of distribution does not seem high on the priority list of benefits that 401(k) plan participants are requesting, nor is it the type of benefit that a plan participant could not create on its own,” Wagner told RIJ.

“For those plan sponsors for whom the risk of civil litigation for breach of fiduciary duty was holding them back from introducing lifetime income options, the SECURE Act would be an impetus to take action, but the number of plan sponsors in that category may not be large, and may not include many small employers.”

If these experts don’t think these bills will change the status quo much, why is the retirement industry so excited about them?

© 2019 RIJ Publishing LLC. All rights reserved.

Do Fiduciary Rules Work, or Do They Backfire?

Posted on May 30, 2019 by -

Using internal data from one of the nation’s top five annuity issuers—its identity isn’t revealed—analysts at Northwestern University and the University of Chicago try to resolve questions that arose during the recent battle over the Department of Labor’s fiduciary rule but were never settled:

  • If regulators required all commission-paid brokerage reps to meet a fiduciary standard of conduct when selling annuities (to retirement account owners, in the DOL’s case), would the reps offer advice that was more client-friendly than before?
  • Or would the regulation raise their compliance costs and increase their legal liability so much that they would exit the market?

In other words, would a fiduciary rule cleanse the vendor-financed annuity distribution model of its worst conflicts of interest, or would it backfire and drive an imperfect but worthwhile business model out of existence?

Despite the death of the Department of Labor’s 2016 fiduciary rule (a casualty of the Trump victory in that year’s presidential election), that question lives on. Individual states are pursuing their own versions of it, and economists Vivek Bhattacharya and Gaston Illanes at Northwestern and economist/attorney Manisha Padi at the University of Chicago recently conducted a study that they thought might, indirectly at least, provide some answers.

Using 2013-2015 annuity sales data from a large anonymous source (“within the top-five companies by market share in the market for annuities”), they analyzed the patterns of variable annuity (VA) sales by broker-dealer reps and “dually registered” advisors (registered investment advisors, or RIAs, with broker-dealer affiliations) in counties facing each other across the borders of neighboring states.

In each case, one state had fiduciary requirements for financial intermediaries but the adjacent state did not. The analysts hoped to use geographical differences in fiduciary standards to shed light on a change (i.e., before-and-after the 2016 DOL would have gone into effect) in fiduciary standards.

“The critics of the fiduciary rule argued that it would only change the cost of advice and the composition of firms selling annuities, and that it wouldn’t improve the quality of advice,” Padi told RIJ this week. “We found that broker-dealer representatives in states with common law fiduciary duties sold cheaper and better products and sell fewer variable annuities overall.”

They also found that the annuities that VA owners would receive (if they annuitized those contracts) had higher net present values, on average, than VA contracts sold in the states without fiduciary rules. As for the cause of the difference, they speculated that in states where “stockbrokers are recognized as having fiduciary responsibilities, where it’s easier for clients to sue them for misconduct, that the additional source of liability might affect the way they are trained and socialized,” Padi said.

“Fiduciary duty does not simply increase fixed costs,” they write. “We find that, in the market for annuities, fiduciary duty shifts the set of products purchased by investors away from variable annuities and towards fixed and fixed indexed annuities. We then focus on variable annuities and find that fiduciary duty leads broker-dealers to sell products with more investment options and higher returns.”

But the authors of the study do concede “that fiduciary duty causes exit of broker-dealers from the market, with the incidence most heavily slanted towards local broker-dealers.” That is, the added compliance costs associated with a fiduciary rule could cause brokerage firm consolidation.

“We find that imposing fiduciary duty on broker-dealers reduces the number of broker-dealer firms operating in the market by about 16%. Moreover, we document a compositional shift to not just investment advisory firms—whose number are not significantly affected by the regulation—but also to broker-dealer firms with larger footprints.”

The findings of the study are not conclusive. It’s never easy to gauge the consequences of new regulation; as with an organ transplant, the regulated industry might fight it instead of accepting it, even if it’s for the overall good of the body politic.

The annuity business in particular is extremely complex, and the authors don’t always seem to know what they don’t know about annuity products or distribution channels. “This is a working paper version and we will be incorporating feedback from industry experts,” Padi told RIJ.

But they had privileged access to high-quality, granular sales data, and seem to have a basis for concluding that fiduciary rules don’t necessarily backfire in the marketplace. These findings could become an important piece of evidence as individual states decide whether or not, in the absence of the issuance of a satisfactory uniform federal fiduciary standard, to establish or strengthen their own.

© 2019 RIJ Publishing LLC. All rights reserved.

Flash: House passes major retirement bill

Posted on May 23, 2019 by -

The U.S. House of Representatives today passed the SECURE Act (H.R. 1994), a retirement policy reform bill supported by Democrats, Republicans, and many advocacy groups, including the Insured Retirement Institute (IRI) and the American Council of Life Insurers (ACLI).

The bipartisan vote was 417 for and three against, with Representatives Thomas Massie (R-KY), Chip Roy (R-TX), and Justin Amash (R-MI) voting against.

The bill will eventually be merged with a similar Senate bill, the Retirement Enhancement and Savings Act (S. 972), which has already been passed by the Senate Finance committee. The bills are not controversial and the final legislation is said to have a good chance of becoming law, even in these politically polarized times.

Wayne Chopus, president of the IRI, a major lobbyist for the annuity industry, said in a release, “Americans face a retirement crisis of too little savings amplified by existing barriers that discourage and hamper the ability of small employers to offer a workplace retirement plan.”

The SECURE Act (Setting Every Community Up for Retirement Act, H.R. 1994), is intended, among other things, to help close the gap in the availability of workplace retirement plans at millions of small U.S. companies. At any given time, only about half of full-time workers in the U.S.—many of them low-paid and minority workers—don’t have access to plans because their employers don’t offer one.

Elements of the SECURE Act are aimed at remedying that problem. The bill would allow employers, along with dozens or hundreds of other employers, to join large 401(k) plans, known as “open multiple-employer plans,” that will be created by retirement plan service providers—much the way employers currently join large health plans.

Individual states such as Oregon, California and others are sponsoring state-run, low-cost Roth IRA programs for employees at small businesses as another way to close the coverage gap. It remains to be seen whether the state-specific public plans or the open multiple-employer plans will revolutionize the small company retirement plan market, or if the coverage gap will simply persist.

The bill, whose content was based on an earlier Senate bill called RESA (see below), is also aimed at reducing the legal liabilities that are said to discourage employers of all sizes from offering annuity products within the context of their plan investment options.

In addition, the measure requires retirement plans to provide participating workers with an illustration of how much monthly income their current or projected retirement savings account balance might deliver. Additionally, the bill raises the age to begin required minimum distributions from retirement accounts from 70½ to 72.

The House action was led by Rep. Richard Neal (D-Mass.), chairman of the House Ways and Means Committee, and the Committee’s Ranking Member, Rep. Kevin Brady (R-Texas). Rep. Ron Kind (D-Minn.) and Rep. Mike Kelly (R-Penn.) also have also supported retirement security legislation.

The Senate has a similar bill under consideration that shares a number of the same provisions as the House-passed legislation. Retired Sen. Orrin Hatch (R-UT) introduced RESA (the Retirement Enhancement and Savings Act, S. 972) several years ago, reportedly in response to energetic lobbying by the ACLI, but the bill was punted from session to session until this year. The Senate Committee on Finance unanimously approved its latest version.

© 2019 RIJ Publishing LLC. All rights reserved.

Allianz Life enhances popular FIA contracts

Posted on May 23, 2019 by -

Allianz Life Insurance Company of North America has added new benefit features to several of its fixed index annuities (FIAs), including the Allianz 222 contract, which was the top-selling annuity contract in the independent agent channel, in the independent broker-dealer channel and in the FIA industry overall for calendar year 2018.

The new benefits, which apply only to newly-issued contracts, are:

  • New Activities of Daily Living (ADL) qualifications for the Allianz Income Multiplier Benefit on the Allianz 222 Annuity.
  • A new two-year point-to-point crediting option on Allianz 222, Allianz 360, and Allianz Accumulation Advantage annuities.
  • New index lock feature on select index allocations for Allianz 222, Allianz 360, and Allianz Accumulation Advantage annuities.

Regarding the changes in the Income Multiplier Benefit on Allianz 222 contract, clients who can perform only four of six ADLs can now double their withdrawal income. This will allow them to receive the multiplied benefits while staying at home. Previously, the benefit was triggered only by confinement in an eligible nursing home, hospital or assisted living facility.

For owners the Allianz 222, 360, and Accumulation contracts, the availability of the new two-year point-to-point crediting method may help to minimize the effects of mid-year market volatility. The new lock-in feature on those contracts allows clients to lock in an index value once at any time during the crediting period.

This feature, intended to give clients more control over their FIA, is available on both annual and two-year point-to-point with participation rate crediting methods.

© 2019 RIJ Publishing LLC. All rights reserved.

Sales of Bonds and Fixed Annuities Soar

Posted on May 23, 2019 by -

Despite the eternal sunshine of the U.S. economy, American investors are buying financial umbrellas and rain coats in record quantities.

The S&P500 Index posted an all-time high of 2,945.83 on April 30, bond yields are still suppressed, and public companies continue to buy back their own shares. But fixed annuity sales are up sharply, and either bond funds or money market funds are receiving most of the net flows into mutual funds.

Taxable bond funds absorbed positive net flows of about $42.5 billion in April, the second-best month in the past three years and the best since January 2018, according to Morningstar’s Direct Fund Flows Commentary for April 2019. For the year ending on April 30, taxable bond funds gained $177.7 billion, or almost double the net flows into U.S. equity funds.

“Many attribute these flow trends to demographics as aging baby boomers cut their equity holdings in favor of more-conservative bond funds,” wrote Morningstar senior analyst Kevin McDevitt and associate analyst Michael Schramm in their monthly fund flows report. Municipal bond funds received net flows of $7.1 billion in April and $37.1 billion in the past year.

On the insurance products side of the street, fixed and fixed index annuity sales were a combined $38 billion for the first quarter, up almost 40% from the year-ago quarter, according to LIMRA Secure Retirement Institute’s latest U.S. Retail Annuity Sales Survey.

“This is the strongest start for fixed annuities ever,” said Todd Giesing, annuity research director, LIMRA SRI. “The uptick in fixed annuity sales continued the momentum fixed annuities experienced in 2018, and was bolstered by recent volatile equity markets, which had investors seeking solutions with guarantees.”

Annuity sales trends

Fixed annuity sales (including FIAs) have outperformed variable annuity (VA) sales in 11 of the last 13 quarters, representing 63% of total annuity sales. Overall, U.S. annuity sales were $60.8 billion, up 17% from first-quarter 2018 results. It was the highest first quarter for total fixed annuity sales since 2009, according to LIMRA SRI press release.

Indexed annuity sales increased 24% in the first quarter, totaling $18 billion. This is the third consecutive first quarter growth for indexed sales. Sales of fixed-rate deferred annuities, (book value and market value-adjusted) were $15.1 billion in the first quarter, up from $8.7 billion in the first quarter of 2018. After multiple quarters of declining with the 10-year Treasury rate, fixed-rate deferred sales rose 68% this quarter.

Single premium immediate annuity sales had a record first quarter up 33% to $2.8 billion, compared with prior year results. Deferred income annuity (DIA) sales increased 23% in the first quarter 2019 to $633 million. DIA sales have remained in the $520-$660 million range for the past 10 quarters.
In the first quarter, variable annuity (VA) sales totaled $22.8 billion, down 7% from the prior year. Despite a slight uptick for overall yearly VA sales at the end of 2018, VA sales can’t seem to gain traction.

“The steep [stock] market declines from fourth quarter last year have impacted VA sales this quarter,” noted Giesing. “While we did see low sales in January and February, March sales were a bit stronger, indicating we will likely see better results in the second quarter. Despite the expectations of improvement, VAs have an uphill climb,” continued Giesing. “Beyond economic factors, competitive fixed annuity products have made the landscape even more difficult for the VA market. SRI forecasts VA sales in 2019 to decline slightly.”

Registered indexed-linked annuity sales (RILAs) were $3.5 billion this quarter, an increase of 60% compared with first quarter 2018 results. These products represent 15% of total VA sales. Excluding RILA products, variable annuity sales declined 14%.

Bond sales trends

Bonds dominated mutual fund flows in April and in the year ending April 30, according to Morningstar. Total estimated net flows into all bond funds were $49.6 billion and $214.8 billion, respectively. For the year ending in April, bond funds had more positive flows than all long-term funds combined ($214.8 billion vs. $184.8 billion).

By comparison, net flows into U.S. equity funds (excluding sector funds, which were down) were $17.1 billion and $90.2 billion for the two periods, respectively. Money market funds, another refuge from volatility, received net flows of almost $247 billion for the year ending April 30, but lost a net $16 billion in April.

Overall, stock fund assets still outweigh bond fund assets by almost 3:1. Stock funds (U.S., sector, international and allocation funds) represent about $14 trillion of long-term mutual fund assets, according to Morningstar. Bonds represent about $4.8 trillion; other assets include money market funds ($3.1 trillion), commodity funds, and alternative funds.

Behind the tepid $90.2 billion of net inflows to stock funds over the year ending April 30, there’s been a continuation of a 10-year trend toward passive to active funds. “Passive U.S. equity inflows largely matched active outflows over the past 10 years, taking in about $1.35 trillion,” the Morningstar report said.

© 2019 RIJ Publishing LLC. All rights reserved.

‘An Economist Walks Into a Brothel’

Posted on May 23, 2019 by -

Allison Schrager has written a book about risk-taking that is by turns delightful, instructive, irreverent and wise. She draws on the basic principles of modern financial theory to illuminate the ways in which we can deal sensibly with risk in everyday (and not so everyday) situations. Conversely, she uses these quotidian examples to illustrate the basic maxims of finance.

The book opens with a fascinatingly kinky chapter on the risks to sex workers and clients in the legally sanctioned brothels of Nevada. The risks to the women of abuse or death is reduced by the open, legal and regulated nature of the business, and the risk of STDs to both them and their clients is reduced by regular and frequent testing.

But their reduced risk entails relatively lower pay. Lawful sex workers can’t demand as much as call girls, who wouldn’t work in unregulated and illegal settings unless they got paid enough to offset the added risk. This chapter illustrates, among other things, the basic principle that there’s a correspondence between risk and reward.

A subsequent chapter on horse-breeding—like all the chapters in the book, worth reading simply for its clear account of some key facets of an arcane or offbeat industry—illustrates the importance of diversification, as well as the risk–reward relationship. (Incidentally, do readers know what a “teaser horse” is? Hint: It’s not a mare.)

Thoroughbred breeders with the foal of a famous money-earning sire face a critical decision when the horse reaches the age of two. They can sell it for a reasonable price, or they can hold on until it reaches age three and starts to race. If a colt turns out to be a champion, they can reap huge profits. The earnings and more importantly the stud fees of champion stallions can be spectacular. However, this is a huge gamble. Many thoroughbreds are called but few are chosen. The author observes that breeders do not diversify their risk sufficiently—they should engage in cross-breeding to encourage gene diversity. Instead, they tend to bet big on a handful of long-shots.

I was also struck by the remark, which the author attributes to Warren Buffett, that diversification is protection against ignorance, not a strategy for superstar investors. I would take issue with that. Even superstar investors have to recognize the risk-return relationship. I also wonder why the techniques of superstars cannot be replicated. Do they possess state secrets? Could it be—perish the thought—that the Sage of Omaha simply has “hot hands?” Do economies of scale significantly reduce the costs of his operations?

As an illustration of moral hazard, Schrager’s chapter on big wave surfing is a tour de force. Surfers are organized and hold technically-oriented meetings that address risk reduction and the role of the latest surfing and related technology. The comparison between the meetings held by surfers and those of pension and retirement industry geeks is hilarious.

A vital risk-reward tradeoff is present when a surfer has to decide whether to take the first in a series of waves—it’s the biggest but also the most dangerous. Moral hazard arises because the invention and use of jet skis in bringing rescuers to downed surfers has also increased the propensity for surfers to take on more risks. An important parallel is drawn between surfing and financial derivatives, which do provide a form of insurance, but which have become forbiddingly complex and may promote excessive risk-taking. Similarly, “safer” cars have apparently led to more if less fatal accidents.

Other chapters illustrate the importance of taking calculated risks, and of recognizing the link between one’s irrational tendencies and excessive risk-taking. Schrager also points out the role of basic uncertainty, when the probabilities of success or failure cannot be calculated. The chapter on the “fog of war” is particularly instructive in this respect. It emphasizes the need for flexibility: in war, that means allowing commanders in the field to move to Plan B if Plan A isn’t working. This point is illustrated with a gripping account of now General H.R. McMaster’s successful offensive during the Gulf War.

This book has an honored place on my bookshelf. I hope it will find its way unto the book shelves of many readers of this review.

© 2019 RIJ Publishing LLC. All rights reserved.

RIJ’s 500th Issue

Posted on May 23, 2019 by -

Dear readers, this is the 500th issue of Retirement Income Journal.

The idea for RIJ can be traced in March 2009, the lowest point of the Great Financial Crisis. Until then I was writing and editing Annuity Market News, which circulated mainly among members of the National Association for Variable Annuities (now the Insured Retirement Institute). That publication had just been cancelled by its owner, SourceMedia.

Within a few days, Jeremy Alexander, of Beacon Research, phoned me to find out what my next steps would be. I wasn’t sure. I had spent the previous 2½ years reporting on the annuity industry. By “reporting,” I mean talking to hundreds of life insurance executives, actuaries, academics, attorneys and software developers on the phone, by email and in person at conferences. I had recently written Annuities for Dummies. My spouse was working, but our two oldest daughters were still in college.

Amid the chaos, one element remained constant: the global retirement crisis. I had returned to journalism in 2006, after nine years in Vanguard’s retirement marketing department, specifically to write about what struck me as one of the most important news stories of our time: The baby-boomer age wave and the pension crises (public, private and personal) that it was triggering all over the world. As a boomer, I was living that story. As a reporter, I felt compelled to “cover” it.

So I started a new web-based publication. I created a domain and a website. I located off-the-shelf platform vendors for content management and email distribution. On the strength of sweat equity, Retirement Income Journal was born. Its content and the audience matched that of Annuity Market News, but everything else was different. RIJ was a weekly, not a monthly. It was web-only, with no print edition. Annuity Market News circulated more or less free to its readers; RIJ would need cash flow.

The choice of revenue model was never much in question. To report “without fear or favor,” as the Times put it, on whatever aspects of the retirement story appeared interesting and timely to me, the publication needed paid subscribers. Managing the conflict between serving readers and advertisers just wouldn’t work for me.

So, in December 2009, I put up a “paywall” and began soliciting subscribers. In what still seems like a near-miracle, people and companies responded. Spontaneously, and (as far as I knew) independently of each other, they bought individual and corporate subscriptions. At that moment in time, the “retirement industry,” an unofficial federation of individuals and organizations with similar interests and purposes—an entity more universal than the annuity industry—needed this type of periodical.

RIJ has no formal mission statement, but it always had goals:

  • To inform readers about the latest products and processes that could help boomers convert savings to income. Though written for professionals, it would have the interests of near-retirees at heart.
  • To talk to the retirement industry in a voice it would recognize—as a member of it but not as a captive of it. If I hadn’t worked inside the annuity industry, this would have been impossible.
  • To publish content that reveals the borderless nature of the retirement crisis. The story was international in nature, especially in a financially globalized world.
  • To deconstruct the disinformation that circulates so glibly in the financial services industry. I wanted to report what industry executives say to each other, not what they say to the public.
  • To exploit the overlooked drama of the retirement business. A topic that involves life, death, fate, chance, greed, fear, brains, ambition, and trillions of dollars was neglected by most of the publishing world.
  • To make the e-newsletter and website colorful enough, in words and pictures, to make people want to open their weekly RIJ e-mail.

On its tenth birthday, RIJ is still a work in progress. The subject is so large. The potential is barely touched. As for the future, I and my team—Laura Chinnis on the tech side and Laurel Cavalluzzo on the marketing side—are in the process of strengthening our coverage for and circulation among financial advisors. There are also a couple of books I’d like to write. For inspiration, I keep a glazed ceramic tile on a shelf above my desk, inspired by 15th century explorers and fired a couple of decades ago at the Moravian Pottery & Tile Works in Doylestown, PA. It says, “Plus Ultra.”

© 2019 RIJ Publishing LLC. All rights reserved.

© 2019 RIJ Publishing LLC. All rights reserved.

We Are All Active Investors Now

Posted on May 16, 2019 by -

Investors have long debated whether their portfolios should be actively managed or passively track a market index. But that discussion is becoming a sideshow. Attention is shifting to what matters most: the active decisions about strategic asset allocation that largely determine subsequent investment returns.

To paraphrase Milton Friedman in the 1960s, we are all active now.

True, passive global exchange-traded funds (ETFs) have experienced explosive growth—from just over $200 billion in assets in 2003 to more than $4.6 trillion last year—which has enabled them to gain market share from more expensive actively managed funds. And investors should always take the lower-cost option if paying higher fees for an active fund brings little additional value (especially during bull markets, when simply being in the game can yield outsize returns).

Yet the rapid rise of low-cost ETFs has had two other important effects on investment management.

First, active management fees have come under pressure, particularly for weaker- performing funds. For example, the proportion of hedge fund managers charging “two and twenty” fees—a 2% management fee plus 20% of any profits earned—has fallen below one-third. Given mediocre hedge fund performance over the past decade and the emergence of liquid alternatives, it’s surprising that fees haven’t fallen further. Moreover, average fees for active funds across all investment strategies fell from about 1% in 2000 to 0.72% in 2017, a downward trend that shows no signs of abating.

Second, the proliferation of ETFs has blurred the distinction between passive and low-cost investing. Strictly speaking, a passive strategy is one that continuously rebalances a portfolio to track a market-capitalization-weighted index. Yet many ETFs go well beyond this textbook definition by offering investors exposure to particular regions, sectors, factors, or types of credit, as well as a multitude of other “sub-market” criteria. These funds are not passive, but rather instruments for expressing active investment views inexpensively.

But now ETFs themselves face challenges. Several decades ago, the advent of cheaper investment vehicles, including ETFs, boosted investors’ net returns. Between 1979 and 1992, for example, the average weighted retail mutual-fund expense ratio was about 1.5% (including sales load fee). But with the average fee on actively managed funds now below 75 basis points, versus about 44 basis points for ETFs, the “excess return” to ETFs is falling.

What’s more, the rapid expansion of ETFs coincided with bull markets. Index performance largely dictated security selection, and asset allocation meant little more than piling into stocks, bonds, and credit. But those days are probably over. Further sustained market advances are unlikely, given stretched stock and bond valuations, slowing economic and earnings growth, and heightened political and policy uncertainty. Broad market returns are likely to be lower, with episodes of volatility probably more frequent.

In a world of lower returns and a narrowing fee gap between active and passive investment vehicles, investors must shift their emphasis from cheap market access to proper portfolio construction. After all, the choice of which asset-allocation strategy to pursue determines most of an investment portfolio’s return. Other factors, such as tactical asset allocation or the choice of instrument, are of secondary importance and may account for less than 10% of portfolio variance.

The biggest mistake investors could make in today’s environment is to seek a safe haven in “balanced” portfolios of stocks and bonds. Both asset classes suffer from unattractive valuations and deteriorating fundamentals. It beggars belief to think that holding a roughly equal proportion of each will deliver satisfactory results.

Instead, investors must recognize that lower risk-adjusted returns—as reflected in falling Sharpe ratios—and shifting market correlations place a premium on genuine diversification and loss avoidance. Diversification requires investors to pay attention to market, factor, and non-directional sources of return, and also to focus on volatility and correlation. Avoiding losses calls for flexible decision-making to cut exposures when necessary.

Some of the instruments that investors need to diversify and avoid losses may well be low-cost. But many of them, including long/short or alternative risk-premium strategies, are unlikely to be found in the ETF universe. A blended approach is therefore likely to provide the greatest diversification benefits.

Rather than worrying about whether their portfolios are actively or passively managed, investors should focus on the crucial decision of strategic asset allocation. The tired active-passive investment debate has run its course. We truly are all active investors now.

© 2019 Project Syndicate.

AIG enhances index annuities

Posted on May 16, 2019 by -

AIG Life & Retirement, a division of American International Group, Inc., has added two new living benefit riders to its Power Series of index annuities: the Lifetime Income Plus Flex and the Lifetime Income Plus Multiplier Flex.

These riders allow contract owners to:

  • Change coverage options between single and joint life to meet varying income needs and life events, such as marriage, divorce or death.
  • Take withdrawals without losing their annual step-ups and doubling guarantee.
  • Access money and not lock in their withdrawal percentage for life until they are ready to start retirement income.

The enhanced Power Series also offers the Russell 2000, a U.S. small-cap stock index, and the MSCI EAFE, an international stock index, in addition to the existing S&P 500, PIMCO Global Optima and ML Strategic Balanced index options.

Last month, AIG Life & Retirement announced “Plan for 100,” a new initiative focused on preparing individuals, employers and financial advisors for retirements that could last four decades or more.

The initiative, with its 100-year theme complementing the centennial celebration at AIG, includes the launch of a new website (Planfor100.com) and podcast series to raise awareness about the impact of increased longevity and educate Americans about potential solutions.

© 2019 RIJ Publishing LLC. All rights reserved.

Many regret claiming SS early: MassMutual

Posted on May 16, 2019 by -

In a survey of 60-somethings who have already filed for Social Security retirement benefits, MassMutual discovered that many Americans who claim early regret doing so and wished they had filed later and captured higher monthly benefits.

The 2019 MassMutual “Social Security Pulse Check,” a co-venture with AgeFriendly.com, uncovered a cruel irony: Many people file early because they aren’t working, lack savings, and need the monthly income Social Security provides; yet the same people would benefit most from claiming later.

“Many are not saving enough for retirement and need to access funds the minute they can—regardless of the longer term impact of the decision—and in some cases, unforeseen health issues are complicating the issue,” said Mike Fanning, head of MassMutual US, in a release this week.

The survey showed that:

  • 30% filed at age 62 or younger
  • 38% wished they filed later
  • 53% filed out financial necessity, such as not saving enough
  • 30% filed as the result of unforeseen health issues or employment changes

In an extreme example, a high-earning, healthy married couple could be leaving more than a half million dollars “on the table,” or as much as $2,000-4,000 per month for life, if both filed for benefits at age 62 instead of age 70, the release said. A surviving spouse could receive $1,000 to 2,000 per month less for life as a result of a primary earner filing at age 62.

Most survey respondents (79%) felt that they had the right amount of information about when to file for Social Security retirement benefits, and 58% didn’t get help or advice.

For more information and examples of write-in commentary from survey respondents, visit this blog.

MassMutual is a corporate founding sponsor of Age Friendly Advisor and member of the Alliance for Lifetime Income and the MIT AgeLab. Age Friendly conducted the MassMutual Social Security Pulse Check via an online survey of 618 individuals age 70+ in March/April 2019.

© 2019 RIJ Publishing LLC. All rights reserved.