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Public pensions suffer in 4Q2018

Posted on February 20, 2019 by Editorial Staff -

The Milliman Public Pension Funding Index deficit rose to $1.693 trillion as of December 31, 2018, up from $1.387 trillion at the end of September 2018.

“Public pensions took a huge hit in the fourth quarter of 2018,” a Milliman release said. “For plans in which benefits paid out exceed contributions coming in, this is difficult news, as investment returns are critical to slow the outflow of funding.”

In 2018 Q4, public plans experienced a $306 billion loss in funding, largely due to a quarterly investment return of -6.39% in aggregate. This was the largest quarterly funding decrease since the PPFI began in September 2016.

Estimated investment returns for plans in Q4 ranged from a low of -10.27% to a high of -2.18%. As a result, the funding ratio of the Milliman PPFI dropped from 72.9% at the end of September to 67.2% as of December 31.

The total pension liability (TPL) continues to grow. It stood at an estimated $5.164 trillion at the end of Q4, up from $5.123 trillion at the end of Q3. Nine plans dropped below the 90% funded mark during the quarter; there are now just eight plans above this mark, down from 17 at the end of Q3.

The Milliman 100 Public Pension Funding Index can be seen at http://www.milliman.com/ppfi/. To receive regular updates of Milliman’s pension funding analysis, email the firm at [email protected].

Milliman has conducted an annual study of the 100 largest defined benefit plans sponsored by government jurisdictions in the U.S since 2012. The Milliman 100 Public Pension Funding Index projects the funded status for pension plans included in our study, reflecting the impact of actual market returns, utilizing the actual reported asset values, liabilities, and asset allocations of the pension plans.

The results of the Milliman 100 Public Pension Funding Index are based on the pension plan financial reporting information disclosed in the plan sponsors’ Comprehensive Annual Financial Reports, which reflect measurement dates ranging from June 30, 2016, to December 31, 2017. This information was summarized as part of the Milliman 2018 Public Pension Funding Study, which was published on January 15, 2019.

Taken to the Cleaners, in Yehud

Posted on February 20, 2019 by Kerry Pechter -

When I dropped off a sack of dirty clothes and linen at the laundry this morning, I met the owner of the shop, Aviram, an Israeli of about 40. He has brown hair, blue eyes, and a beard, curly and slightly more Hellenic than Hasidic. A small knot gathered the hair on top of his head. He runs the business with his mother, a petite woman with white hair who, at that moment, was pressing a shirt.

“Yes, we have a lot of taxes. Too much, I think,” said Aviram, who has a gentle but confident manner. He lived on Staten Island for six years, but for some reason he speaks English with a slight British accent. “I’ve been to Philadelphia too. I saw the bell,” he said, half-smiling. Like me, he’d been a stranger in a strange land.

When I told him that I was visiting Israel to study the retirement/pension system (see last week’s cover story), he confirmed that more than half of most Israelis’ take-home pay goes to income taxes and social insurance taxes, which include taxes for the basic state pension and health care, as well as mandatory contributions to a personal pension and an unemployment fund.

“Would you like a coffee?” he asked.

Regarding pensions, he mentioned a grandfather with dementia, and one’s risk of forfeiting a pension through early death. He conceded, however, that you could lock in payments for 20 years and thereby protect one’s heirs. Day care for children is free to working parents in Israel, he said. I told him that, in the US, the cost of day care can be a heavy burden for young couples.

The subject easily drifted to Israeli politics and to Bibi Netanyahu. For Aviram, the four-term right-wing prime minister represents the unyielding and dogmatic view that groups of humans will always separate into a successful 20% and a not so successful 80%, just as unhomogenized milk separates into cream and whey.

A smarter, better leader than Netanyahu would be Dan Ariely, Aviram said. I was surprised that to hear that. Ariely is an Israeli psychologist who teaches at Duke University and famously blogs about behavioral economics. He’s written several books, including the best-selling, Predictably Irrational (HarperCollins 2008).

The 2008 financial crisis, which occurred as Israel was beginning its transition from a voluntary to a mandatory defined contribution system of retirement savings, was very tough on Israeli families, Aviram told me. As in America, the crash reduced the savings of many older people who had just retired and didn’t have pensions.

Suddenly underfunded, they turned to their children for financial help. But, in a country where housing costs are high—despite apartment construction projects wherever you look—real estate prices, many young couples expect help with their first mortgages from their parents. The combination of circumstances has evidently made life difficult for families.

As we talked, customers arrived and left. A tall Haredi Jew in a black suit and black broad-brimmed hat stopped in with laundry and instructions. He left, and two men with close-cropped hair came up. The older one, evidently the father, spoke in Russian to Aviram, who doesn’t speak Russian. “They’re from Uzbekistan. The Hebrew word for it is Bukhara,” Aviram said. [Bukhara is a region and city in Uzbekistan.] “They come to Israel more for the economy than the religion.” By way of saying goodbye, the older man went to each us in turn, smiling and clasping our right hands with both of his.

Aviram again offered me refreshment. “Would you like a sandwich? We’re making some in the back. Are you sure?”

The fee for washing, drying and folding five kilograms (11 pounds) of laundry was 50 shekels or about $14. I’m out-sourcing my laundry because I haven’t yet figured out how to operate my cousin’s apartment-sized washer and dryer. Aviram’s assistant, who was busy folding someone else’s clothes, told me to come back in five hours. My laundry, including three pressed items, would be ready then.

Allianz Life and AIG report 2018 results

Posted on February 20, 2019 by Editorial Staff -

Allianz Life Insurance Company of North America this week announced its 2018 financial results, with assets under management rising to $138 billion and total premium reaching $12.7 billion, 16% higher than 2017.

Allianz Life’s operating profit topped $1 billion for the third year in a row. Though in line with expectations, it was down slightly from the record $1.18 billion in 2017 due to market volatility. The company paid $2.8 billion in life insurance and annuity benefits to policyholders and contract owners in 2018, up 7% from 2017.

Life insurance premium hit a record high in 2018, rising 7% to $101 million. Fixed index annuity (FIA) sales reached $9.2 billion, up 23% over the previous year. Allianz Life continues to be a top seller of FIAs in the United States. Index variable annuities (IVA) premium were $2.11 billion in 2018, down slightly from 2017.

More than 7% of Allianz SE global operating profit in 2018 was generated by its Allianz Life subsidiary (and more than 20% of Allianz SE global operating profit in the life/health sector).

Allianz Life retained all of its ratings in 2018. Current ratings include:

Standard & Poor’s: AA (Very Strong), the third highest of 21 possible ratings.
Moody’s Investors Service: A1, the fifth highest of 21 possible ratings.
M. Best: A+ (Superior), the second highest of 16 possible ratings.

American International Group, Inc.

AIG reported a net loss of $622 million, or $0.70 per share, for the fourth quarter of 2018, compared to a net loss of $6.7 billion, or $7.33 per share, in the prior-year quarter.

Adjusted after-tax loss was $559 million, or $0.63 per share, for the fourth quarter of 2018, compared to adjusted after-tax income of $526 million, or $0.57 per diluted share, in the prior-year quarter.

“Throughout 2018, significant foundational work was undertaken to remediate AIG’s core underwriting capabilities,” said Brian Duperreault, AIG’s president and CEO, in a release. We moved quickly to reduce risk and volatility, as well as implement strategies that we believe will accelerate our progress in 2019.”

(All comparisons are against the fourth quarter of 2017, unless otherwise indicated.)

Net investment income

Fourth quarter net investment income from our insurance companies, including the Legacy insurance portfolios, decreased 18.1% from the prior-year quarter to $2.8 billion.

The fourth quarter was impacted by net losses on alternative investments as well as investments in equity securities resulting from elevated volatility in the credit markets and unfavorable performance in the equity markets. For the full year, net investment income from our insurance companies, including the Legacy insurance portfolios, totaled $12.7 billion.

Life and retirement earnings

Fourth quarter adjusted pre-tax income of $623 million reflected the impact of declining equity markets and widening credit spreads in all businesses, against a backdrop of attractive new business margins, and solid growth in premiums and deposits in Individual Retirement, Group Retirement and Life Insurance as well as several opportunistic Institutional Markets transactions.

GOE increased primarily due to new business acquisition, international expansion, and investments in core businesses. The fourth quarter of 2018 adjusted return on equity was 9.8%.

Life and retirement – Commentary

In Individual Retirement, adjusted pre-tax income reflected lower net investment income due to lower base spreads and yield enhancements and lower fee income driven by unfavorable credit and equity market performance. Net flows excluding Retail Mutual Funds were positive and reflected strong sales.

In Group Retirement, adjusted pre-tax income reflected lower fee income, lower base spread and yield enhancements driven by unfavorable credit and equity market performance and continued investments made in the business. Group Retirement net flows reflected higher sales offset by higher surrenders due to the loss of large plan accounts, as well as higher individual surrenders.

In Life Insurance, adjusted pre-tax income reflected higher net investment income due to business growth and higher alternative investments returns. Mortality was favorable to pricing expectations.

In Institutional Markets, adjusted pre-tax income reflected investments in technology and infrastructure and reserve refinements, partially offset by growth in the portfolio, which drove higher net investment income.

Inside Seeking Alpha’s Money Machine

Posted on February 20, 2019 by Kerry Pechter -

Through Seeking Alpha’s algorithms, its editors can see, analyze and direct the massive flow of content that passes through its systems every day. They can tag each article, measure its popularity, and play matchmaker between contributors, readers and advertisers—millions of times over.

This mountain of meta-data naturally creates opportunities for monetization. Seeking Alpha can identify the most sought-after authors and articles, segment the most valuable, and charge extra for access to them. Content is currency for Seeking Alpha, as long as the editors (and their algorithms) keep making smart decisions about which content readers will be willing to pay for.

Here are CEO Eli Hoffmann’s descriptions of the three products that Seeking Alpha has created in recent years for readers who want more than the basic access to stories and alerts about their favorite securities or topics.

Essential

“The first product is Seeking Alpha Essential. That costs $20 a month. You get four key value propositions: Access to all our content, qualitative stock ratings from our network of contributors, author tracking—you can track specific contributors as well as stocks—and powerful tools, such as unique charts that we’ve created for readers. We were the first to chart yield-on-cost. It shows you how much, since you purchased a particular dividend stock, the yield has gone up or down. There are some unique visualizations,” Hoffmann told RIJ.

PRO Plus

“The next is PRO Plus, which is targeted to the high net worth individual or the professional investor,” he said. “It costs $200 a month. PRO Plus gives you access to everything in Essential plus exclusive access to the ‘Single Best Idea’ of the day.” Every business day, the subscriber receives an article of two or three thousand words that the editors consider especially valuable. It’s a curated stock-tip, essentially.

PRO Plus subscribers can also access a filtering tool; institutional investors, for instance, can pre-select only institutional content and screen out the stories meant for retail investors. “The institutional investors are not yield-chasers or dividend investors,” Hoffmann said. The writer who contributes the idea that become the day’s ‘Single Best Idea’ earns $1,000. That bounty incentivizes all of the contributors to produce better and better content.

Investor Marketplace

The third and final product is the Investor Marketplace, where investment experts can launch private communities for the Seeking Alpha followers. “If I write about chip stocks, for instance and I have a large following, I can come to Seeking Alpha and say, ‘I have an engaged audience, I will share my entry and exit points from the market, I will share my entire portfolio, with weightings, and we can live chat while things are actually happening in the market.’ We provide them with a marketing funnel,” Hoffmann said.

“Whoever sets up a marketplace can make it whatever they want it to be. They could say, ‘If you’re an accredited investor, you can join my community for $50 or $100 or $1,000 a year.’ We have about 160 analysts, with 160 private communities. It’s a terrific opportunity for smart analysts. The analysts get a free funnel. The members get free contributions from the analyst, and a community chat room.”

Seeking Alpha doesn’t just wait for the contributors to request a personal Marketplace; it clocks the traffic of every one of them and urges high-traffic writers to start their own exclusive pods. “They charge a minimum of $20,” Hoffmann told RIJ. “We do the payment processing, the customer service, the password resets and a dashboard that tells them who their clients are, what they’re reading, and which articles are converting readers to community members. We have a four-member team dedicated to our Marketplace Contributors.”

Collectively, those 160 analysts take in about $8 million a year. Of that, Seeking Alpha receives 25%. It’s a small part of the company’s overall business today, but one where Hoffmann sees vast potential.

Ireland to auto-enroll workers into retirement plans

Posted on February 20, 2019 by Editorial Staff -

Ireland plans to begin auto-enrolling workers in defined contribution retirement plans by 2022, according to a report in IPE.com this week. The republic’s labor officials based their decision on months of feedback from employers, workers, pension industry groups, academics and advocacy groups.

An estimated 65% of Ireland’s private-sector workforce has no private pensions savings, and Ireland is one of only two OECD (Organization for Economic Co-operation and Development) countries without a mandatory earnings-related element to retirement saving.

The other outlier is the US. Certain US states, such as Oregon, have begun auto-enrolling workers who don’t have a retirement plan at work into IRAs, but there’s no national mandate for participation in defined contribution plans. A national auto-enrolled “MyRA” program was initiated by the Obama administration but canceled by the Trump administration.

“While we have identified a unanimous consensus on the need for increased retirement savings,” said Regina Doherty, head of the Department of Employment Affairs and Social Protection. “There is also a diverse range of views on the preferred manner and means of delivering the auto-enrollment solution.”

Under the government’s proposals, employees would initially contribute 1% of salary to the scheme, matched by employers. This would escalate by 1% a year for both parties for the first six years. By 2028, the total contribution for each member would be 12% of salary a year. New members joining after 2022 would pay the same percentage as everyone else.

The state will add a further 2% contribution, making a total of 14% of salary, with a salary cap of €75,000. This state subvention – 2%, compared with 6% from the employee – effectively provides 25% tax relief. Universal social charge (USC) and pay-related social insurance (PRSI) are payable on employee contributions.

There’s still disagreement over how much risk the default investment option should take. The Society of Actuaries in Ireland said the default investment fund should be diversified, since the government’s recommendation of a low-risk fund was unlikely to provide an adequate income at retirement.

Tax policy and coverage requirements are also topics of dissent. One actuary protested the abolition of the “existing 40% rate of tax relief” for contributions by higher-rate taxpayers. Under the proposal, their income tax would drop by a maximum of 25% of their deductible contributions instead of up to 40%.

“Savers on the standard rate of tax and those that pay no tax will benefit from the proposed new approach,” said Roma Burke, partner at LCP. “But higher-rate taxpayers will be significantly worse off under the scheme as they will only get 25% relief, compared with 40% under the current regime. This will affect the average person who, according to the Central Statistics Office, earns a full-time wage of €46,402 ($52,437) a year and is therefore subject to the higher rate of tax.”

The decision to exclude workers under age 23 or over age 60, those earning below €20,000 a year, and the self-employed from auto-enrollment was also criticized. These workers would be able to opt in to the system, however. Overall, 35% of the working population are currently not covered by private pensions. With the exclusions, the new proposals would only address 410,000 of a potential pool of 860,000 employees, one observer said.

Whether Ireland can meet the 2022 deadline remains to be seen. “Given the fundamental issues to be ironed out, industry opinion has been that 2022 was an ambitious deadline for bringing auto-enrollment into operation, but the minister said she expected the system to be operational by this deadline,” the IPE.com report said.

Risk-sharing brings higher early payouts in Lincoln’s new VA income option

Posted on February 20, 2019 by Editorial Staff -

Lincoln Financial Group this week announced the introduction of a new optional income rider designed to maximize retirement income from savings in tax-deferred retirement accounts such as IRAs and 401(k)s during the early retirement years. It’s called Lincoln IRA Income Plus.

The actuaries at Lincoln appear to have rearranged their risk budget to plump up the withdrawal rate to as much as 7% per year at age 70—the age when many retirees think about taking their first distributions from IRAs and 401(k)s in order to meet the requirements that begin at age 70½. There’s also a 6% annual simple interest deferral bonus in years without withdrawals.

To make this higher payout rate possible, Lincoln shifted some of the back-end risk onto the contract owners by reducing the payout rate if, and only if, the account value happens to go to zero before the contract owner dies. The market risk is buffered a bit by the required to select from among seven risk-managed funds-of-funds.

At age 70, contract owners can begin receiving 7% of their benefit base or 6.25% of their benefit base each year. If they choose the 7% withdrawal option and the account value falls to zero before they die, the withdrawal rate drops to 4%. If they choose the 6.25% option, the withdrawal rate drops to 5% if the account value falls to zero before they die.

The rider costs 1.35% per year. The product fact sheet doesn’t say whether it’s on the benefit base or the account value, or if it runs for the life of contract. The rider is not available for joint life contracts, probably because couples can’t merge their qualified accounts.

The annual deferral bonus is 6% simple interest. According to the product fact sheet, the Income Base increases annually by the greater of a 6% simple enhancement or the account value growth. The 6% annual growth will continue for the earlier of 10 years or through age 85 with the 10-year period re-starting upon an account value reset, which would occur if the balance reaches a new high-water mark. The 6% enhancement is not available in any year a withdrawal occurs. Annual market step-ups are available through age 85.

Lincoln isn’t the first variable annuity issuer to impose a downward adjustment of the payout rate if the product becomes in-the-money. In the press release, this feature is presented as a path to higher income in the early years of retirement, when retirees tend to spend the most. But, from a contract owner’s perspective, the adjustment could reduce annuity income by 1.25 or 3.0 percentage points at an advanced age, depending on which payout option he or she chose.

According to a release, the IRA Income Plus living benefit option, which joins Lincoln’s existing selection of living benefit options, has these additional features:

Ready-made portfolios. There are seven managed-risk asset-allocation fund options with equity allocations of 26% to 80%, with expense ratios ranging from 0.99% to 1.11%. The risk management method inside the funds is not described in the fact sheet. Such methods help buffer the funds from positive or negative market volatility.
A return of premium death benefit. Beneficiaries receive the initial investment, adjusted for withdrawals, even if the account value falls to zero.

“LIMRA Secure Retirement Institute research on the state of retirement shows that current retirees are conservative about withdrawing from the assets they’ve saved, and four in 10 pre-retirees are worried about running out of money,” a Lincoln release said.

The majority of retirees take withdrawals from their qualified, or tax-deferred, savings only to satisfy their required minimum distributions (RMDs), the amount that must be withdrawn from qualified accounts once they reach age 70½, the release said.

How Seeking Alpha Seeks Alpha—from Israel

Posted on February 19, 2019 by Kerry Pechter -

Last fall, as the days darkened and the US stock market face-planted itself as if to show the Fed how much it hates rate hikes, millions of investors logged onto SeekingAlpha.com for advice, data, forecasts and digital hand-holding from their peers and from the market pundits who post there.

Most of those visitors would probably be surprised to discover that Seeking Alpha is headquartered not in New York City but in the upscale Tel Aviv suburb of Ra’anana (“fresh,” in Hebrew). They might also be surprised to find that its editor and CEO is a Haredi or strictly Orthodox Jew who wears a traditional black coat, white shirt, black yarmulke and white beard.

Not to belabor the point, but a slight double-take registers on meeting Eli Hoffmann; it was as if the chief of Bloomberg News, for example, turned out to be an Amish clergyman. In any case, attire becomes immaterial as soon as Hoffmann—the handpicked successor to Seeking Alpha founder David Jackson—begins speaking in colloquial English about the site.

SA’s big idea

“The thinking behind Seeking Alpha was, here we are, in the early 2000s, and the Internet is enabling a lot of people to self-publish. Investment professionals started using blogs to say, ‘Here’s my thesis on a particular stock.’ Other investors who followed that stock would discover this cool guy writing about it,” said Hoffmann, who is 50 and emigrated to Israel from Toronto in 2006.

Seeking Alpha’s Tel Aviv staff

“So investors developed personal ‘blog rolls,’ and soon they were following a couple of hundred guys. But blogs aren’t an efficient way to consume content, because the guy who wrote about tech stocks also wrote about industrials, and you were only interested in reading his posts about tech stocks. It became overwhelming for people,” he added.

“The idea behind Seeking Alpha was, ‘Let’s consolidate this content and disseminate it to investors.’ We let investors create ‘watch lists’ and just get what they are interested in. We built stock quote pages, an e-mail distribution system and all of those things.

“Then we reached out to all the bloggers and said, ‘We’ll take your posts, make sure they’re formatted and contain the right stock tickers, and build readership for you. You do nothing.’ We don’t take everything the bloggers write. Just what we think is good. Nobody was thinking about monetizing his blog yet. Writers liked the prestige, and the opportunity to demonstrate thought leadership and stress-test their ideas.”

41 million visits per month

On that value proposition, Seeking Alpha was born in 2004. It has since grown from a modest forum for stock bloggers and investors into a searchable clearinghouse of terabyte upon terabyte of curated content. Some 13.5 million traders, wealth managers, and institutional investors visit the website 41 million times each month to read the latest articles from 16,000 contributors about more than 8,600 companies. Much of the content is chatter, some is speculation, a lot is self-promotion and bits of it are red-hot market-moving news, especially about smaller companies that don’t get written up anywhere else.

The company’s workforce of 170 is scattered across the globe. Fifty are in Tel Aviv, 75 in the US, and the rest in Kiev, Ukraine, and several cities in India. The product design, R&D, and finance functions are in Israel. Advertising sales and content generation teams are based in New York. There’s an R&D and testing group in Kiev. Teams in India serve as auxiliaries to the rest.

“What made this different is that we would give you, the reader, only the content you want to view,” Hoffmann told RIJ. “We discover that by asking you a few basic questions. It’s a fairly simplistic algorithm. The distribution system is complex, and we watch what you’re reading, but the in-box technology and the notifications we send out are based on what we know about you. It’s not artificial intelligence. It’s not learning as it goes.”

Seeking Alpha’s Tel Aviv HQ

Seeking Alpha was created by David Jackson, an Oxford graduate who analyzed the telecom equipment sector for five years at Morgan Stanley in New York. He left in early 2003 to manage money (long/short) and to look for opportunities in financial publishing. After publishing an e-book on exchange-traded funds, he launched Seeking Alpha in early 2004. Along the way, Benchmark, Accel and DAG Ventures provided venture capital.

Jackson assembled a New York-based ad sales team in 2006. The company ran on ad revenue and venture capital for the next seven or eight years. It charged readers nothing and paid its editorial contributors $10 per 1,000 page views. Its value proposition for advertisers: our readers are ready to buy assets; they’re not just kicking tires. (Five years ago, Seeking Alpha developed premium subscription services. See sidebar on today’s homepage.)

Not ‘investo-tainment’

“We realized that we had very valuable readers, because their mindset was about decision-making. They’re actually thinking about buying. People don’t come to Seeking Alpha to read about sports and politics along with stocks. We’re not a very good lunchtime read. We’re not investo-tainment. But what we’re very good at is that, when people are ready to make an investment decision, this is where they come.”

The website’s reputation was made in 2013 when professors at Purdue and other US universities gave a series of presentations arguing that Seeking Alpha broke news that moved markets. They analyzed the number of negative words about a stock on Seeking Alpha and linked it to the stock’s subsequent performance.

In their paper, “Wisdom of Crowds: The Value of Stock Opinions Transmitted to Social Media,” the professors wrote, “We attest that the fraction of negative words in SA articles and the fraction of negative words in SA comments both negatively predict stock returns over the ensuing three months.” The study appeared to prove that Seeking Alpha was doing more than generating pointless noise or catering to return-chasers.

‘You can beat the indexes’

Hoffmann

Seeking Alpha itself professes no particular philosophy about investing; it is the ‘house,’ not the gambler. “We’re mainly a community of self-directed investors who are making their own decisions. We don’t give anybody a guide to investing. We’re not on a mission to convert people to stock pickers. We even have contributors who are anti-stock-picking. For a large number of people, indexing and buying low-cost funds is a reasonable approach. In fact, you will probably end up with a bigger nest egg if you do that,” said Hoffmann, who, years ago, tried his hand at day-trading and gave up.

“But I do think there’s value to be had from investing the time it takes to pick stocks. Here people can buy into stocks with a smaller market. As a Seeking Alpha reader, you may not want to bet on whether GM stock is going to go up or down. There’s no information edge on that. But if you’re buying stocks with market caps of around $250 million, and you’re serious about stock-picking and you’re willing to put in the time, you can beat the indexes.”

Why People Should Work Longer, but Don’t

Posted on February 19, 2019 by Editorial Staff -

Financial advisors shouldn’t urge older workers to save more during the current low-return period, according to a new paper from the National Bureau of Research. Such under-savers would be wise to work longer and claim Social Security later.

Also new this week: an Issue Brief from the Center for Retirement Research (CRR) at Boston College says that factors like poor health, a spouse’s retirement, unemployment, a financial shock (good or bad), and the need to care for an elderly parent can all compel someone to retire early, but they don’t fully explain why so many Americans do.

Adapting to stagnation

The first paper, “Retirement Implications of a Low Wage Growth, Low Real Interest Rate Economy,” grapples with a practical issue: If you reach mid-life and find out that your savings isn’t likely to grow as much as it used to, what action should you take?

The authors, Jason Scott, John B. Shoven, Sita Slavov and John G. Watson, who have written extensively on this topic, assert that when interest rates are low the best thing to do is to claim Social Security later, because the step-up in benefits for each year of delay (until age 70) is larger than the safe interest.

Delaying Social Security in a low interest rate environment offers the greatest benefits to married primary earners, they write. Single men, people in poor health with shortened life expectancies, and married secondary earners benefit less from delay. In a zero real interest environment, however, virtually everyone can improve his or her financial positions in retirement by delaying Social Security.

With respect to adapting to a low wage growth environment, their recommendations vary. If the individual faces low wage growth but economy-wide wage growth is high, Social Security benefits will rise and, in a sense, bail out the low-wage worker. If only the individual faces high wage growth, he or she should keep working because wage-indexed Social Security benefits won’t climb much.

Explaining early retirement

The second paper, “Retiring Earlier Than Planned: What Matters Most?” represents an effort to explain a conundrum. The percent of Americans who say they intend to work past age 65 tripled (to 48%) between 1991 and 2018. Yet many people report that they didn’t keep that promise and retired earlier than planned.

The authors surveyed reviewed years of household survey data containing responses from 58-year-olds to questions about their planned age of retirement. Within the sample studied by the CRR team, 21% said they planned to retire at 66 or later. But of those, 55% eventually retired earlier than age 66. Overall, 37% of the people in the sample retired earlier than planned. Clearly, delayed retirement is more an aspiration than a practice.

The brief’s authors, Alicia Munnell, Matthew S. Rutledge and Gregory T. Sanzenbacher, assembled a line-up of likely suspects to explain this behavior but couldn’t identify a culprit.

“Health shocks are most important in driving workers to an earlier retirement, followed by job-related changes and family transitions. However, these factors only partly explain early retirements, which suggests that other factors that are harder to measure also play a role,” they write.

“The factors considered here explain only about a quarter of early retirements. Future research should focus on what other factors may lead to early retirement, with “soft” factors not considered here – like the lure of leisure time in retirement – playing potential roles.”

Frequency of Life Shocks that May Prompt Retirement

Posted on February 19, 2019 by No Author -

Honorable Mention

Posted on February 14, 2019 by Editorial Staff -

Murphy succeeds Reynolds at Great-West

Edmund F. Murphy III, 56, will succeed Robert L. Reynolds as President and CEO of Great-West Life & Annuity Insurance Company (GWL&A), the US subsidiary of Great-West Lifeco Inc. and the parent of Empower Retirement, according to a release this week.

Reynolds will shift to a new role as Chair of Great-West Lifeco U.S. LLC. He will remain president and CEO of Boston-based Putnam Investments, also a subsidiary of Great-West Lifeco US.

Last month the company announced it had agreed to sell, through reinsurance, substantially all of its individual life insurance and annuity business to Protective Life.

Murphy will assume leadership of all of GWL&A, which has $544 billion in assets for approximately 9.2 million customers (as of 12/31/18), and includes Empower Retirement, Great-West Investments and the company’s individual life insurance and annuity businesses. Murphy will remain president of Empower Retirement and will report directly to Great-West Lifeco President and CEO Paul Mahon.

Empower, the nation’s second largest retirement service provider after Fidelity, was formed in 2014 and serves approximately 39,000 retirement plans sponsors.

Before his 2014 appointment as president of Empower, Murphy had served as managing director of the Defined Contribution and Investment-Only business at Putnam Investments since 2009 and served on the firm’s Operating Committee. Previously, he held executive roles at Fidelity Investments in its institutional, private equity and retail businesses. He spent six years before that at Merrill Lynch.

Murphy holds a bachelor’s degree from Boston College and is a graduate of the General Manager Program at Harvard Business School.

AIG garners DALBAR awards

AIG Life & Retirement’s Individual Retirement business has received multiple customer service awards for annuity excellence from DALBAR, an independent organization for evaluating, auditing and rating business practices, customer performance, product quality and service in the financial services industry.

AIG’s Individual Retirement business was the only recipient of the DALBAR Communications Seal of Excellence for superior annuity policyholder communications this year, according to a release.

AIG received the top ranking for its variable annuity statements for the 17th consecutive year. For the 12th consecutive year, AIG received the DALBAR Annuity Service Award for its delivery of “consistent, best-in-class” customer service through its contact center.

Investors flock to emerging market ETFs: TrimTabs

Money has been flooding into emerging markets assets in the wake of the Federal Reserve’s dramatic shift in monetary policy, according to a report this week from TrimTabs research.

Emerging markets bond exchange-traded funds have been drawing record inflows. Emerging Markets bond ETFs added $900 million (3.0% of assets) on the five trading days ended Friday, February 8, and the inflow of $1.5 billion (5.1% of assets) on the five days ended Tuesday, February 5 was the biggest five-day inflow on record. Inflows have occurred on all but two trading days this year.

Emerging Markets equity ETFs issued $2.7 billion (1.5% of assets) on the past five trading days, and the inflows of $3.5 billion (1.9% of assets) on the five trading days ended February 5 was the biggest five-day inflow since April 2014. These funds have not had a single daily outflow since late December.

“Demand for emerging markets assets has exploded as the Fed has turned dovish,” said David Santschi, director of liquidity research at TrimTabs Investment Research. “Traders are playing the Powell put aggressively, although they seem to prefer broad exposure rather than bets on particular regions.”

Latin America was the most popular emerging markets region last week as a percentage of assets. Latin America equity ETFs added $200 million (2.0% of assets).

DPL Financial to distribute Jackson National no-commission annuities

Posted on February 14, 2019 by Editorial Staff -

In its first distribution partnership in the independent registered investment advisor (RIA) channel, Jackson National Life announced this week that independent RIAs can now buy two of its variable annuities and one of its fixed indexed annuities on DPL Financial’s no-commission online insurance purchasing platform.

“The DPL Financial platform gives us an opportunity to expand into the independent RIA channel where we had no footprint or available products,” Scott Romine, president of Advisory Solutions at Jackson National Life Distributors, told RIJ this week.

“The current focus of the Envestnet Insurance Exchange is on connecting insurance carriers with broker-dealer wealth management platforms, of merging the insurance and investment ecosystems,” he said. “The advisors there are IARs—investment advisor representatives—working for the corporate RIA.” The DPL platform works exclusively with independent RIAs.

The variable annuities are Perspective Advisory II, which offers lifetime income riders, Elite Access Advisory II, which is designed for tax-free accumulation in a wide range of investment options. The indexed annuity is MarketProtector Advisory. Perspective Advisory II was launched in 2017. All are no-commission versions of Jackson annuities.

“We’re model-agnostic,” Romine said. “Consumers like the fee-based model, but we’re also committed to the brokerage side. We believe in choice. We just want to make sure that we’re in both places.”

“Our model is effectively a referral model from RIAs,” DPL founder David Lau told RIJ. “We help educate RIAs about when insurance products can be beneficial to clients. They then refer clients to us. We serve as the licensed agent to execute the contract and then the RIA can be added to the contract to manage the assets.”

A Mixed Economic Bag in 2019

Posted on February 14, 2019 by Nouriel Roubini -

After the synchronized global economic expansion of 2017 came the asynchronous growth of 2018, when most countries other than the United States started to experience slowdowns. Worries about US inflation, the US Federal Reserve’s policy trajectory, ongoing trade wars, Italian budget and debt woes, China’s slowdown, and emerging-market fragilities led to a sharp fall in global equity markets toward the end of the year.

The good news at the start of 2019 is that the risk of an outright global recession is low. The bad news is that we are heading into a year of synchronized global deceleration; growth will fall toward – and, in some cases, below – potential in most regions.

To be sure, the year started with a rally in risky assets (US and global equities) after the bloodbath of the last quarter of 2018, when worries about Fed interest-rate hikes and about Chinese and US growth tanked many markets. Since then, the Fed has pivoted toward renewed dovishness, the US has maintained solid growth, and China’s macroeconomic easing has shown some promise of containing the slowdown there.

Whether these relatively positive conditions last will depend on many factors. The first thing to consider is the Fed. Markets are now pricing in the Fed’s monetary- policy pause for the entire year, but the US labor market remains robust. Were wages to accelerate and produce even moderate inflation above 2%, fears of at least two more rate hikes this year would return, possibly shocking markets and leading to a tightening of financial conditions. That, in turn, will revive concerns about US growth.

Second, as the slowdown in China continues, the government’s current mix of modest monetary, credit, and fiscal stimulus could prove inadequate, given the lack of private-sector confidence and high levels of overcapacity and leverage. If worries about a Chinese slowdown resurface, markets could be severely affected. On the other hand, a stabilization of growth would duly renew market confidence.

A related factor is trade. While an escalation of the Sino-American conflict would hamper global growth, a continuation of the current truce via a deal on trade would reassure markets, even as the two countries’ geopolitical and technology rivalry continues to build over time.

Fourth, the eurozone is slowing down, and it remains to be seen whether it is heading toward lower potential growth or something worse. The outcome will be determined both by national-level variables – such as political developments in France, Italy, and Germany – and broader regional and global factors.

Obviously, a “hard” Brexit would negatively affect business and investor confidence in the United Kingdom and the European Union alike. US President Donald Trump extending his trade war to the European automotive sector would severely undercut growth across the EU, not just in Germany. Finally, much will depend on how Euroskeptic parties fare in the European Parliament elections this May. And that, in turn, will add to the uncertainties surrounding European Central Bank President Mario Draghi’s successor and the future of eurozone monetary policy.

Fifth, America’s dysfunctional domestic politics could add to uncertainties globally. The recent government shutdown suggests that every upcoming negotiation over the budget and the debt ceiling will turn into a partisan war of attrition. An expected report from the special counsel, Robert Mueller, may or may not lead to impeachment proceedings against Trump. And by the end of the year, the fiscal stimulus from the Republican tax cuts will become a fiscal drag, possibly weakening growth.

Sixth, equity markets in the US and elsewhere are still overvalued, even after the recent correction. As wage costs rise, weaker US earnings and profit margins in the coming months could be an unwelcome surprise. With highly indebted firms facing the possibility of rising short- and long-term borrowing costs, and with many tech stocks in need of further corrections, the danger of another risk-off episode and market correction can’t be ruled out.

Seventh, oil prices may be driven down by a coming supply glut, owing to shale production in the US, a potential regime change in Venezuela (leading to expectations of greater production over time), and failures by OPEC countries to cooperate with one another to constrain output. While low oil prices are good for consumers, they tend to weaken US stocks and markets in oil-exporting economies, raising concerns about corporate defaults in the energy and related sectors (as happened in early 2016).

Finally, the outlook for many emerging-market economies will depend on the aforementioned global uncertainties. The chief risks include slowdowns in the US or China, higher US inflation and a subsequent tightening by the Fed, trade wars, a stronger dollar, and falling oil and commodity prices.

Though there is a cloud over the global economy, the silver lining is that it has made the major central banks more dovish, starting with the Fed and the People’s Bank of China, and quickly followed by the European Central Bank, the Bank of England, the Bank of Japan, and others. Still, the fact that most central banks are in a highly accommodative position means that there is little room for additional monetary easing. And even if fiscal policy wasn’t constrained in most regions of the world, stimulus tends to come only after a growth stall is already underway, and usually with a significant lag.

There may be enough positive factors to make this a relatively decent, if mediocre, year for the global economy. But if some of the negative scenarios outlined above materialize, the synchronized slowdown of 2019 could lead to a global growth stall and sharp market downturn in 2020.

Quarterly reports from four annuity issuers

Posted on February 14, 2019 by Editorial Staff -

Brighthouse Financial, Inc., reported this week that annuity sales increased 27% quarter-over-quarter and 10% sequentially in the fourth quarter of 2018, the highest since Brighthouse split off from MetLife. Higher sales of the Shield structured indexed annuity and fixed indexed annuities drove the increase, a release said.

Overall, Brighthouse reported net income available to shareholders of $1,442 million in the fourth quarter of 2018, or $12.14 on a per diluted share basis, compared to net income available to shareholders of $668 million in the fourth quarter of 2017.

The company ended the fourth quarter of 2018 with stockholders’ equity (“book value”) of $14.4 billion, or $122.67 on a per share basis, and book value, excluding accumulated other comprehensive income (“AOCI”) of $13.7 billion, or $116.58 on a per share basis.

For the fourth quarter of 2018, the company reported adjusted earnings* of $186 million, or $1.56 on a per diluted share basis.

The adjusted earnings for the quarter reflected $13 million of net unfavorable notable items, or $0.11 on a per diluted share basis, including a $26 million net favorable impact related to modeling improvements resulting from an actuarial system conversion and establishment costs of $39 million related to planned technology and branding expenses associated with the company’s separation from its former parent company.

For the full year 2018, the company reported net income available to shareholders of $865 million, or $7.21 on a per diluted share basis. The company reported full year adjusted earnings of $892 million, or $7.44 on a per diluted share basis, and full year adjusted earnings, less notable items, of $998 million, or $8.33 on a per diluted share basis.

Corporate expenses in the fourth quarter of 2018 were $233 million pre-tax, down from $242 million pre-tax in the third quarter of 2018. During the quarter, the company repurchased $63 million of its common stock under its stock repurchase program announced on August 6, 2018, resulting in a total of $105 million of its shares repurchased during 2018.

American Equity Investment Life

The holding company for American Equity Investment Life reported this week that total sales by independent agents for American Equity Investment Life Insurance Company (American Equity Life) increased 13% in the fourth quarter of 2018, relative to the previous quarter, while total sales by broker-dealers and banks for Eagle Life Insurance Company (Eagle Life) decreased by $23 million or 12% relative to the previous quarter.

Sales of FIAs were up 11% from the previous quarter, to $1.1 billion. They were driven by a 14% increase in sales for American Equity Life. FIA sales for Eagle Life, at $163 million, were down $1 million or about one percent from the previous quarter, the company said in a release.

“We experienced sequential and year-over-year increases in FIA sales in American Equity Life’s independent agent channel,” said John Matovina, chairman and CEO, in a statement. “Our higher new money investment yields allowed us to take several actions late in the third quarter and early in the fourth quarter to enhance our competitiveness in both the accumulation and guaranteed lifetime income market segments.

“The launch of AssetShield on October 9 was successful; it joins IncomeShield as one of our two top selling products. In the fourth quarter, combined sales for AssetShield and the Choice series, our other accumulation product in the independent agent channel, were greater than total sales of Choice in the third quarter. Choice and AssetShield accounted for 38% of sales in the fourth quarter compared to 35% of sales in the third quarter.

“In the guaranteed lifetime income space, we improved the competitive position of the IncomeShield series and our other guaranteed income products by increasing payout factors in early October. The IncomeShield series, which was the third best-selling guaranteed lifetime income product in the independent agent channel in the third quarter, accounted for 33% of our FIA sales in the fourth quarter.”

Commenting on the market environment and the outlook for FIA sales, Matovina added: “The market in each of our distribution channels continues to be challenging. However, we are pleased with our competitive positioning for both accumulation and guaranteed lifetime income products. Business activity in January 2019 was appreciably ahead of January 2018 and we are optimistic that the sales momentum we developed in the fourth quarter will continue in 2019.”

“In the bank channel, we are seeing meaningful sales from the large bank we referenced in our prior release and continue to expect this relationship to be a key account for Eagle Life. We are also continuing to build out our employee wholesaling model which will be a key initiative for Eagle Life in 2019,” Matovina said.

“Our intent is to use our employee wholesalers to target accounts that do not use third party wholesalers and to complement our third party wholesalers when possible. When accomplished, we will be able to serve banks and broker-dealers in the manner in which they desire while lowering our distribution costs.”

Policyholder funds under management at December 31, 2018 were $51.1 billion, a $441 million or 1% increase from September 30, 2018. Fourth quarter sales were $1.1 billion before coinsurance ceded and $1.0 billion after coinsurance ceded. Gross sales and net sales for the quarter increased 12% and 18%, respectively, from fourth quarter 2017 sales. On a sequential basis, gross and net sales increased 8% and 12%, respectively.

American Equity’s investment spread was 2.56% for the fourth quarter of 2018 compared to 2.67% for the third quarter of 2018 and 2.75% for the fourth quarter of 2017. On a sequential basis, the average yield on invested assets decreased by 3 basis points while the cost of money rose 8 basis points.

Average yield on invested assets was 4.51% in the fourth quarter of 2018 compared to 4.54% in the third quarter of 2018. This decrease was primarily attributable to a decline in the benefit from non-trendable investment income items from 11 basis points in the third quarter to 7 basis points in the fourth quarter. The average yield on fixed income securities purchased and commercial mortgage loans funded in the fourth quarter of 2018 was 5.02% compared to 4.97% in the third quarter of 2018 and 4.61% for the first six months of 2018.

The aggregate cost of money for annuity liabilities of 1.95% in the fourth quarter of 2018 was up 8 basis points from 1.87% in the third quarter of 2018. The benefit from over hedging index linked interest obligations was 3 basis points in the fourth quarter of 2018 compared to 7 basis points in the third quarter of 2018.

American Equity reported fourth quarter 2018 net income of $53.8 million, or $0.59 per diluted common share, compared to net income of $36.8 million, or $0.41 per diluted common share, for fourth quarter 2017.

For the year ended December 31, 2018, net income was $458.0 million, or $5.01 per diluted common share, compared to $174.6 million, or $1.93 per diluted common share, for the year ended December 31, 2017.

Non-GAAP operating income1 for the fourth quarter of 2018 was $90.3 million, or $0.99 per diluted common share, compared to non-GAAP operating income1 of $74.5 million, or $0.82 per diluted common share, for fourth quarter 2017. For the year ended December 31, 2018, non-GAAP operating income1 was $425.7 million, or $4.66 per diluted common share, compared to $285.1 million, or $3.16 per diluted common share, for the year ended December 31, 2017. Non-GAAP operating return on average equity excluding average AOCI1 for the year was 18.6% based upon reported results and 15.4% excluding the impact of assumption revisions.

Prudential Financial

Prudential Financial, Inc. this week reported year-end and fourth quarter 2018 results. Net income was $4.074 billion ($9.50 per common share) for the year ended December 31, 2018, compared to $7.863 billion ($17.86 per common share) for previous year.

After-tax adjusted operating income was $5.019 billion ($11.69 per Common share) for 2018, up from $4.652 billion ($10.58 per Common share) for 2017.

U.S. Individual Solutions, consisting of the Individual Annuities and Individual Life segments, reported adjusted operating income of $419 million for the fourth quarter of 2018, down from $639 million in the year-ago quarter.

The Individual Annuities segment reported adjusted operating income of $445 million in the current quarter, compared to $541 million in the year-ago quarter. Excluding the notable items above, results decreased $38 million from the year-ago quarter reflecting lower policy fees, net of associated risk management and other related costs, driven by a decrease in average variable annuity account values. These decreases were partially offset by favorable hedging results and a greater contribution from net investment spread results.

Individual Annuities account values were $151 billion as of December 31, 2018, down 10% from a year earlier, driven by market depreciation and net outflows over the year. Individual Annuities gross sales were $2.2 billion in the current quarter, up 38% from the year-ago quarter, reflecting favorable customer reaction to pricing actions and sales of our fixed index annuity product, which launched in the first quarter of 2018.

For the fourth quarter of 2018, net income attributable to Prudential Financial, Inc., was $842 million ($1.99 per Common share), compared to $3.765 billion ($8.61 per Common share) for the fourth quarter of 2017. After-tax adjusted operating income was $1.035 billion ($2.44 per Common share) for the fourth quarter of 2018, compared to $1.173 billion ($2.69 per Common share) for the fourth quarter of 2017.

Consolidated adjusted operating income, adjusted book value and adjusted operating return on equity are non-GAAP measures. These measures are discussed later in this press release under “Forward-Looking Statements and Non-GAAP Measures” and reconciliations to the most comparable GAAP measures are provided in the tables that accompany this release.

The Company’s ongoing operations include PGIM, U.S. Workplace Solutions, U.S. Individual Solutions, International Insurance, and Corporate & Other Operations. In the following segment-level discussion, adjusted operating income refers to pre-tax results.

PGIM, the Company’s global investment management businesses, reported adjusted operating income of $243 million for the current quarter, compared to $306 million in the year-ago quarter.

The decrease of $63 million from the year-ago quarter reflects a $67 million lower contribution from other related revenues, net of associated expenses, which amounted to $57 million for the current quarter. This decrease was partially offset by higher asset management fees, reflecting an increase in average assets under management.

PGIM assets under management of $1.161 trillion were $6 billion higher than the year-ago quarter driven by fixed income inflows partially offset by equity outflows and market depreciation. Unaffiliated third-party net outflows in the current quarter of $3.1 billion included a single institutional fixed income client outflow of $9 billion. Total PGIM net inflows in the current quarter were $9 billion.

U.S. Workplace Solutions, consisting of the Retirement and Group Insurance segments, reported adjusted operating income of $249 million for the fourth quarter of 2018, compared to $313 million in the year-ago quarter.

The Retirement segment reported adjusted operating income of $216 million for the current quarter, compared to $291 million in the year-ago quarter. Excluding the notable items above, results increased $25 million from the year-ago quarter reflecting a higher contribution from net investment spread results and an increase in underwriting gains from growth within our pension risk transfer business.

Retirement account values were $432 billion as of December 31, 2018, up 1% from a year earlier, reflecting positive net flows partially offset by market depreciation. Net flows in the current quarter of $6.2 billion included several pension risk transfer sales totaling $7.5 billion.

Lincoln Financial Group

Lincoln Financial Group this week reported net income for the fourth quarter of 2018 of $399 million, or $1.80 per diluted share available to common stockholders, compared to net income in the fourth quarter of 2017 of $816 million, or $3.67 per diluted share available to common stockholders.

Fourth quarter adjusted income from operations was $475 million, or $2.15 per diluted share available to common stockholders, compared to $440 million, or $1.98 per diluted share available to common stockholders, in the fourth quarter of 2017.

The Annuities segment reported income from operations of $258 million in 4Q2018 compared to $265 million in the prior-year quarter, as a lower reported tax rate as a result of tax reform was more than offset by a decrease in average account values driven primarily by the Athene reinsurance transaction completed in the fourth quarter.

Total annuity deposits of $3.8 billion were up 35% from the prior-year quarter as both variable and fixed annuities benefitted from product and distribution expansion. Variable annuity sales were up 15% versus the prior-year quarter and fixed annuity sales increased 102% over the same period.

Net flows were $675 million in the quarter, which included positive flows from both variable and fixed annuities, compared to net outflows of $222 million in the prior-year period.

For the full year, total annuity sales of $12.4 billion increased 42% versus the prior year. Net outflows of $139 million for the year improved from $2.7 billion in 2017. As a result of the reinsurance transaction in the fourth quarter, average account values decreased 8% from the prior-year period but increased 2% for the full year.

Retirement Plan Services reported income from operations of $45 million, up 10% compared to the prior-year quarter. The growth in earnings is attributable to a lower reported tax rate as a result of tax reform and lower expenses.

Total deposits for the quarter of $2.2 billion were down 11% while deposits for the full year increased 18% to $10.1 billion driven by a 32% increase in first-year sales and 8% growth in recurring deposits.

Net flows totaled $173 million in the quarter compared to $440 million in the prior-year period. For the full year, net flows totaled $2.5 billion, up 76% compared to the prior year. Average account values of $70 billion were up 5% from the prior-year quarter primarily driven by positive net flows.

Net income for the full year of 2018 was $1.6 billion, or $7.40 per diluted share available to common stockholders, compared to $2.1 billion, or $9.22 per diluted share available to common stockholders in 2017. Full year 2018 adjusted income from operations was $1.9 billion, or $8.48 per diluted share available to common stockholders, compared to $1.8 billion, or $7.79 per diluted share, available to common stockholders, for the full year of 2017.

Net income in the prior-year quarter and full year 2017 included non-recurring net favorable items of $417 million primarily related to tax reform.

“Fourth quarter adjusted operating EPS growth of 9% and ROE of 13.5% were strong and consistent with our record full-year results,” said Dennis R. Glass, president and CEO of Lincoln Financial Group.

“Significant accomplishments this past year include restoring positive flows in the Annuities business, outperforming our expectations for the Liberty acquisition, and executing on strategic transactions, which resulted in $2.5 billion of capital deployment. Given our positive momentum, we remain well positioned to drive long-term shareholder value.”

Unsure how much to commit to Roth or traditional accounts? This rule might help.

Posted on February 14, 2019 by Editorial Staff -

A simple rule-of-thumb for allocating savings either to traditional tax-favored savings accounts (contributions deductible, withdrawals taxed) and/or Roth accounts (contributions taxed, withdrawals untaxed) is provided in a recent paper from the Journal of Financial Economics.

“We propose a practical rule with two steps to determine the allocation of savings across traditional and Roth accounts,” wrote the authors, David C. Brown and Scott Cederburg of the University of Arizona and Michael S. O’Doherty of the University of Missouri. The two steps are:

Households that currently fall into a low tax bracket (e.g., the 10% or 15% brackets in the 2015 tax schedule) should invest 100% of their savings in Roth accounts.
Other households should allocate (Current age + 20)% of their retirement savings to traditional accounts with the remainder in Roth vehicles, subject to constraints on account access and investment limits.

“We demonstrate a large economic impact of optimally investing across traditional and Roth retirement accounts, and these effects remain significant in the presence of realistic contribution limits and constraints on account access,” the authors wrote.

“Conventional wisdom suggests that retirement savers with relatively low current incomes benefit most from access to Roth accounts,” while workers in higher tax brackets benefit more from tax-deductible savings account.

“We find, however, that higher-income investors have greater exposures to tax-schedule uncertainty, which can be managed using post-tax Roth options… Investors who believe that rates in the tax schedule are likely to drift upward (downward) prior to retirement should increase their allocations to Roth (traditional) accounts relative to our analysis,” the paper said.

“We do not explicitly model the risk of a [future] structural change in the tax code or the regulations for a particular retirement vehicle,” the authors wrote, they suggest that “a consumption tax system would favor traditional accounts relative to Roth, whereas a flat income tax structure would reduce the tax benefit of traditional investments and make Roth accounts more desirable.”

How Government Policy Promotes Wealth Inequality

Posted on February 14, 2019 by Eugene Steuerle -

Federal tax and spending policies are worsening the problem of economic inequality. But the tax breaks that overwhelmingly benefit the wealthy are only part of the challenge. The increasing diversion of government spending toward income supports and away from opportunity-building programs also is undermining social comity and, ironically, locking in wealth inequality.

Many flawed tax policies are rooted in the ability of affluent households to delay or even avoid tax on the returns from their wealth. By putting off the sale of assets, wealth holders can avoid tax on capital gains that are accrued but not realized. At death, deferred and unrecognized capital gains are exempted from income tax altogether because heirs reset the basis of the assets to their value on the date of death.

While individuals and corporations recognize taxable gains only when they sell assets, they may immediately deduct interest and other expenses. This tax arbitrage makes possible everything from tax shelters to the low taxation of the earnings of multinational companies.

Recent changes in the law have further eroded taxes on wealth. Once, the US taxed capital income at higher rates than labor income, today it does the reverse. For instance, the 2017 tax law sharply lowered the top corporate rate from 35% to 21%, but trimmed the top individual statutory rate on labor earnings only from 39.6% to 37%.

In theory, low- and middle-income taxpayers could use these wealth-building tools as well. But the data suggest that the path to wealth accumulation eludes most of them, partly because they save only a small share of their income. Even those who do save $100,000 or $200,000 in home equity or in a retirement account earning, say, five percent per year may never reap more than $1,000 or so in tax savings annually.

To understand what has been happening to the relative position of the non-wealthy, we need to dig a little into the numbers. Economics professor Edward Wolff of New York University discovered that in 2016 the poorest two-fifths of households had, on average, accumulated less than $3,000 and the middle fifth only $101,000.

Trends in debt tell part of the story. From 1983 to 2016, debt grew faster than gross assets for most households–except for those near the top of the wealth pyramid. It’s not that the government doesn’t aid those with less means. But almost government transfers support consumption, and only indirectly promote opportunity.

Consider the extent to which the largest of these programs, Social Security, has encouraged people to retire while they could still work. Because of longer life expectancy and, until recently, earlier retirement, a typical American now lives in retirement for 13 more years than when Social Security first started paying benefits in 1940.That’s a lot fewer years of earning and saving, and a lot more years of receiving benefits and drawing down whatever personal wealth they hold.

Annual federal, state, and local government spending from all sources, including tax subsidies, now totals more than $60,000 per household—about $35,000 in direct support for individuals. Yet, increasingly, less and less of it comes in the form of investment or help when people are young. Thus, assuming modest growth in the economy and those supports over time, a typical child born today can expect to receive about $2 million in direct assistance from government.

In the meantime, however, government has (a) scheduled smaller shares of national income to assist people when young and in prime ages for learning and developing their human capital, (b) reduced support for their higher education in ways that has now led to $1.4 trillion of student debt being borne by young adults without a corresponding increase in their earning power, and (c) offered little to bolster the productivity of workers.

Any number of programs could have a place in encouraging economic mobility, among them beefed-up access to job training and apprenticeships for non-college goers; wage subsidies that reward work; subsidies for first-time homebuyers in lieu of subsidies for borrowing; a mortgage policy aimed more at wealth building; and promotion of a few thousand dollars of liquid assets in lieu of high-cost borrowing as a source of emergency funds—you get the point.

However, in one recent study, I found that federal initiatives to promote opportunity—many in the tax code—have never been a large fraction of government spending or tax programs and are scheduled to decline as a share of GDP.It would be naïve to assume that fixing any of this will be easy. Republicans seem committed to reducing (not increasing) taxes on the wealthy, while Democrats reflexively support redistribution to those less well off, even when their proposals reduce incentives to save and work.

But until we fix both sides of this equation, don’t expect government policy to succeed in distributing wealth more equally. After all, simply leveling wealth from the top still will leave a large number of households holding zero percent of all societal wealth.

Shekel by Shekel: How Israelis Save

Posted on February 14, 2019 by Kerry Pechter -

Like Americans and Europeans, Israelis have seen big changes in the way they fund their retirements. Until about 25 years ago, older Jewish Israelis in professional jobs could look forward to generous defined benefit (DB) pensions from one or more former employers.

“Once upon a time, it was simple in Israel,” Dan Galai, a fund manager and academic who has had a 50-year career here and in the US, told RIJ during a recent interview in his office in the Ramat Gam district of Tel Aviv.

Dan Galai

“If you were in the government, or affiliated with a university, or you had an army career, you got a pension that was paid out of the budget of the government. There were many different pension plans, and the government issued bonds for them with a guaranteed rate. It was an expensive subsidy.”

Equally unsustainable were private, multi-premium annuities, called pension insurance policies, said Abigail Hurwitz, an Israeli pension expert currently at the Wharton School in Philadelphia. “They insured individuals who didn’t belong either to the government or to any employee union,” she told RIJ. The annuity factor was set at purchase date, rather than at retirement. As life expectancies in Israel rose, these contracts turned out well for annuitants but disastrously for life insurers.

By 1995, the fragility of this fools’ paradise could no longer be ignored. The government eventually bailed out the big pension funds (at a reported cost of about $25 billion), closed them to new enrollment, and replaced them with a voluntary defined contribution system. The feckless practice of setting annuity factors at time-of-purchase for pension insurance policies was ended.

At the start of the 21st century, Benjamin “Bibi” Netanyahu (then Israel’s finance minister, now its prime minister) started rationalizing the economy. In 2003, the government broke the big banks’ cozy monopoly on financial services, forcing them to divest their mutual (aka “provident”) funds. In 2008, the government—acknowledging that the voluntary defined contribution (DC) system, as DC does in the US, left millions of workers without any retirement plan coverage—took a dramatic step and required all employers and workers to contribute to DC plans.

Here’s a pocket-sized overview of the post-2008 mixed retirement system to which Israelis have been adjusting. Most Israelis, like Americans, grope their way into retirement, with a grab-bag of DB pensions from long-past employers, pension insurance policies, unspent severance pay accounts, and new mandatory DC accounts. The different accounts from different periods are typically subject to different tax rules. The various elements often require a licensed pension advisor to sort out.

We’ll cover the high points of Israel’s safety-net pension and its mandatory DC program, which leads to mandatory partial annuitization. Warning: There’s a lot of information here. The Israeli retirement system was laid down in a succession of layers, and studying it requires a kind of archaeological excavation through the multi-dimensional strata of time and law.

Basic old age insurance (and health care)

This program, run by the National Institute of Insurance (NII) and funded by a payroll tax, resembles US-style Social Security, but gives all retires the same old age benefit, not counting certain supplements and adjustments. No one receives more than about $1,000 per month.

Abigail Hurwitz

The payroll tax has two tiers. There’s a 3.55% employer-paid tax on the first 6,164 shekels ($1,690) of income per month. Then there’s a 7.6% employer-paid tax and 7.0% employee-paid tax on income between 6,164 and 43,890 shekels ($12,043) per month. In addition, the employee pays a health insurance tax equal to 3.10% of the first 6,164 in salary and 5% for amounts above that, to 43,890 shekels.

Benefits start at the full retirement age (67 for men, 62 for women). Until age 70, benefits are means-tested, but not after age 70. The flat individual benefit is a modest 1,554 shekels (about $427 a month) in a country where the cost-of-living is comparable to that in the US. At age 80, the benefit notches up to 1,641 shekels ($451). Regarding health care: Israel has a public-private hybrid HMO-based health insurance system, funded by a combination of payroll taxes and co-pays. It continues in retirement.

A retired married couple can receive a spousal supplement of 781 shekels ($215), raising the couples’ pension to 2,335 shekels ($640) a month. Those with dependent children receive 492 shekels ($135) per child, up to two. For a retired couple with two dependent children, the pension would be $885 a month. “That’s peanuts,” a Tel Aviv cab driver told me. “Peanuts!”

Mandatory defined contribution

As Israel grew more market-driven under Netanyahu, the government wanted to shift financial responsibility for retirement onto the public. It made defined contribution plans mandatory, with fixed-percentage contributions from employers and employees.

Today, the employer contributes 6.5% of pay and the employee contributes another 6%. The employer contributes another 6% of salary toward an unemployment (“severance”) fund. If the employee never uses it, he or she can take it as a lump sum in retirement.

Employers in Israel aren’t plan sponsors per se and aren’t supposed to choose plan providers for their workers, although employers can choose their company’s default target date fund provider. Employees are intentionally given a lot of freedom to invest as they wish, and to switch investments (and providers?) at will. Every month, the employer sends a bulk contribution to a clearinghouse, which distributes each employee’s portion to his or her chosen fund provider.

Older Israeli in Jerusalem’s Mahane Yehuda market.

Employees typically send their contributions to a “pension fund” or a “provident fund;” the latter resemble mutual funds. The first offers a combination of retirement savings, life insurance and disability insurance, and contributions to them are capped because their returns are partly subsidized. Contributions to pension funds are tax-free up to a certain amount and excess contributions spill over into other investments.

The government evidently subsidizes the pension funds (not the provident funds) by allowing them to hold special government bonds, which yield a guaranteed 5.75% return (a slice of which 2% to the insurer that manages the fund). Up to 30% of a pension fund’s asset pool can consist of these special-purpose bonds.

The default investment options for participants in pension funds are like target-date funds. These funds have a 10% allocation to the subsidized bonds for people under 50. The allocation rises to 40% at age 50 ad to 60% at age 60 and thereafter in retirement. This glidepath, as in the US, serves as a buffer against sequence-of-returns risk.

Competition between fund providers is designed to keeps a lid on fees. Israelis pay a two-fold fee on their pension contributions. First, there’s an expense ratio for each contribution. Second, an expense ratio is charged on accumulated savings (assets under management). The fees for the two default funds, selected through a government bidding process in 2016, are especially low.

The two default providers are Meitav Dash Investments Ltd. and Halman Aldubi Investment House Ltd. Meitav Dash charges a one basis-point (0.01%) management fee on accrued savings and 131 basis points (1.31%) on each monthly deposit. Halman Aldubi collects an even slimmer one-tenth of one basis point (0.001%) management fee on accrued savings but charges 149 basis points (1.49%) on monthly deposits. As in the US, the default funds are popular.

In addition, employers may contribute on their employees’ behalf to tax-favored “study funds,” which can be withdrawn tax-free after a six-year minimum holding period. As in the US, contributions to pension funds and provident funds are tax-deductible up to a cap. The precise tax rules in Israel are too complex to address here.

Mandatory annuitization

Distribution from Israeli DC plans is more structured than distribution from 401(k) accounts in the US. In the US, distributions from tax-deferred accounts, either in the form of annuity payments, lump sums, or systematic withdrawals, are all taxed as ordinary income. Most US retirees resist taking distributions from tax-deferred accounts until the required age, 70½.

Israel, by contrast, drives partial annuitization (but only of savings since 2008) through a combination of requirements and incentives. Retirees must convert at least part of their tax-deferred savings to a lifetime income stream and pay no income tax on the portion that’s annuitized, up to a limit. Lump-sum withdrawals from pension funds can face up a significant tax. (Forced annuitization was less of a jolt to Israelis than it might be for Americans, since it mimicked their earlier DB pensions.)

Oded Sarig

Most of the new DC pensions are structured as life-with-20-years-certain annuities. “In order to qualify for the tax benefit, the retiree has to annuitize for life. But within that restriction you can select the number of years you want the benefits to last,” said Oded Sarig, a former chief of the Ministry of Finance’s Capital Market, Insurance and Savings Authority, in an interview with RIJ. “You can annuitize with 10 years or 20 years certain,” he added. “You can have joint-and-survivor contracts.”

The standard tax-free income stream is about 4,400 shekels or about $1,200 a month. A recent law, called Amendment 190, adds a new tax break for lump-sum withdrawals, a chance for additional tax-free monthly income from provident funds, and tax-free disbursements at death before age 75. (Amendment 190 is new and complicated, and this description could be flawed.)

An Israeli retiree who owns a provident fund would need to transfer it to a pension fund in order to convert to a monthly income stream. This would not entail buying an individual fixed income annuity from a life insurer, as in the US. The retiree would simply switch from contributing to his or her pension fund to receiving an income from it.

The first monthly payment is determined by dividing the retiree’s assets by a “conversion factor” based on gender, life expectancy at annuitization and an assumed interest rate (currently 4%). The current conversion factor for a payout from a post-2008 savings is about 200. Someone who saved a million shekels in a pension fund could, if they annuitize the whole amount, buy a 5,000-shekel-a-month annuity at today’s rates.

This income, like the income from a variable immediate annuity in the US, can rise or fall, depending on the returns of the underlying portfolio. A retiree’s portfolio would contain almost 100% bonds, 60% of which would be the subsidized special government bonds.

To spread the impact of potential volatility up or down, fund managers use a “smoothing” mechanism. Payments adjust to portfolio performance over rolling three-year periods instead of every month or year, so that the impact of a transient shock to the fund doesn’t fall on one unlucky cohort of retirees. “The participants bear the risks,” Sarig said. “It’s a form of mutual insurance. If the fund runs into problems, the retirees’ income comes down.”

If all this sounds like a hot mess, it is. In a coffee shop in Yehud, a 69-year-old retired electronics engineer and Army officer, Moshe Shahar, said his wife handles the details of his many retirement accounts. He’s nostalgic for the simpler, more generous DB pensions of the rapidly receding past. “The new system has turned out to be a nightmare,” he said, “You get much less than with the old pensions.”

A Genuine ‘Value Fund’ Is Hard to Find

Posted on February 7, 2019 by Kerry Pechter -

“Value” investors are the tortoises of the investing public, following the teaching and examples of Ben Graham and Warren Buffett. By purchasing funds that invest in companies whose share prices lag their fundamental “book” value, they expect eventually to outperform the “hares” —i.e., investors in “growth” companies with fast-rising share prices.

Martin Lettau, an economist at UC-Berkeley’s Haas School of Business, was a value fund investor for years. Then he studied the book-to-market ratios of the stocks—not just in his own funds but in a cross-section of active US funds from 1980 to 2016—and learned that he (and other value investors) have usually been rabbits in disguise.

Martin Lettau

“Many active value funds are closet growth funds,” Lettau told RIJ in an interview. “On average, they hold more growth stocks than value stocks. There are few exceptions. DFA’s [Dimensional Fund Advisors] value fund hold mostly value stocks. Only these funds are what I would call a ‘value fund.’ Growth funds, on the other hand, hold what you would expect them to.”

The upshot is that if you’ve been investing in value funds and are waiting for the value premium to show up and vindicate your patience, maybe you should stop holding your breath and look closer at your funds’ holdings.

“Characteristics of Mutual Fund Portfolios: Where are the Value Funds?” co-authored by Lettau, Sydney Ludvigson and Paulo Mandel, all of Berkeley (NBER Working Paper 25381) analyzed 2,638 actively managed funds in the CRSP/Thomson-Reuters Database. Of those, 574 identified as value funds and 1,130 as growth funds. The sample also included 955 exchange-traded funds and 114 hedge funds. The number of active funds, they note, rose eight-fold, from 185 to 1,424, between 1980 and mid-2016.

The authors reviewed several characteristics of the stocks held by the funds, including the book-to-market ratio. They sorted the stocks into five book-to-market quintiles, from low to high. Then they assayed each fund to measure the percentage of its underlying stocks that belonged to each quintile.

“‘Value funds’ are missing from the US equity market,” they concluded. Counter-intuitively, a larger percentage (24%) of the stocks in value funds came from the lowest book-to-market quintile than from the highest (13%). More than half of all value funds held a larger share of low book-to-market stocks than high book-to-market stocks. Only 7% of value funds held more than 25% of their portfolios in high book-to-market stocks.

“While there are over 1,000 mutual funds with consistently low b-to-m ratios, there are virtually no high b-to-m funds in our sample… Even funds with an explicit ‘value’ objective hold a larger share of low b-to-m stocks than high b-to-m stocks in their portfolios,” the paper said.

“One rationale for having value funds is to exploit the value premium. That is, to get a higher return in the long run than growth funds. Our results show that even the funds that call themselves value funds don’t exploit the value premium,” Lettau told RIJ.

It wasn’t a question of whether or not fund managers have abandoned the book-to-market metric in the age of hard-to-value tech stocks. “We looked at a whole list of measures of value and growth,” Lettau said. “We saw the same pattern for any measure.”

“This pattern is true going back to the 80s, so it’s been consistently true. It’s not style drift on the part of fund managers. It’s a consistent pattern. The purpose of our paper was to survey these facts, which are not well-documented.”

Why don’t most value funds hold value stocks? Lettau says that this question is still unanswered and further research is needed. When he presented his findings to an audience at one of the largest asset management firms, the fund managers there didn’t deny his findings. They suggested however that they are only giving the investing public what it wants. “They said, ‘We’re demand-driven.’

“Apparently it’s easier to sell sexy growth funds rather than boring old value funds. But that goes against the value premium, which says that, on average, cheap stocks will perform better in the long run. But, for whatever reason, investors seem to demand growth and glamour.” Just as surprising to Lettau, seemed to be the fact that the value benchmarks that value fund managers use, such as the CRSP value indices, did not necessarily include only what he considered true value stocks.

Dimensional’s value funds are the exception, according to Lettau. In response to an RIJ query, Dimensional’s co-head of research, Marlena Lee, sent a written description of her company’s process when building value funds. “Are we surprised by Lettau et al. finding for our value funds? No,” she wrote. “In our value strategies, one of their primary focuses is purchasing stocks with low prices relative to a fundamental measure of firm value. Price-to-book ratio is the primary way we do this. Among those stocks, we use their profitability, market cap, momentum characteristics, etc. to improve expected returns. Lettau et al. find that our value funds have a strong focus on stocks with low price-to-book ratios because that is how we have designed them.

“Valuation theory suggests that low market prices relative to fundamental measures of firm size combined with high expectations of future cash flows to shareholders should indicate high expected returns… However, the theory doesn’t tell you the best way to measure and pursue the value premium,” Lee wrote.

Lee sent RIJ a table comparing the 15-year net returns (as of 12/31/2018) of five DFA value funds with the average returns of the corresponding Morningstar Categories, and with the DFA fund’s rank among the funds in each of those categories. Performance was higher than the Morningstar average in each category and the rank was in the top 10% or better for four out of five of the DFA funds. The DFA US Large Cap Value fund showed an annualized return of 7.85% over 15 years. The Morningstar average was 6.52% a year.

“Among the variables we use to identify stocks with higher expected returns are price-to-book, profitability, and market capitalization. These variables can be thought of as capturing different angles of value investing, because they help us identify stocks that have low market prices relative to current fundamental measures of firm value and what future cash flows investors expect to receive.”

In her letter, Lee supported Lettau’s idea that the book-to-market ratio has not become less meaningful or obsolete as a value indicator during the tech-stock era. DFA’s analyses “have not shown any downward trend in the informational content of BtM,” she wrote. “In developed and emerging markets outside the US… the explanatory power of price to book in the past 15 to 20 years is similar to its long-term average.”

Lettau has shared his paper informally with a range of reviewers. “The reaction has been varied,” he said. “Some people are surprised by the degree of the tilt. The fund industry already knows there’s more interest in sexy growth funds. What is surprising is that there are virtually no high book-to-market mutual funds. Different market participants knew vaguely about this, but not the extent of the tilt. In academia, this wasn’t known.

“I had a value fund in my own retirement portfolio. I thought I would capture the value premium. But after writing the paper I looked closer at my fund and saw that it didn’t do what I thought it was doing. Even if the fund says ‘value,’ there’s no likelihood that it’s a value fund.”

Fourth Quarter Fears are Disappearing

Posted on February 7, 2019 by Stephen Slifer -

The stock market’s decline in the fourth quarter suggested that the economy was on the cusp of slipping into recession. As we turn the corner into a new year it is evident that many of those fears were exaggerated.

We now know that employers ignored both the partial government shutdown and stock market turmoil and added 304 thousand jobs in January. The Fed has made it abundantly clear that it is on hold for the foreseeable future and will have to be persuaded to raise rates again.

Manufacturing firms experienced an impressive rebound in orders and production in January. Thus, recent indicators provide reassurance that the economy is chugging along in the first quarter at a pace roughly comparable to other recent quarters.

Two things are fascinating about the 304 thousand increase in employment in January. First, the partial federal government shutdown had no impact on hiring. Second, the jobs market seems to be strengthening. The economy cranked out 183 thousand jobs monthly in 2017, followed by 220 thousand per month in 2018, and 266 thousand in the most recent 3-month period. Perhaps the labor market is not nearly as tight as what most economists believe.

Following the December FOMC meeting the Fed raised the funds rate one-quarter point to a range of 2.25-2.5%. Fed Chair Powell indicated at that time that while the Fed may keep rates steady for a while, he expected two additional rate hikes in 2019. However, this past week he said that the Fed will sit tight for some time and will need to be persuaded to raise rates beyond their current level. That is a distinctly different tone.

The Institute for Supply Management reported that its index for conditions in the manufacturing sector of the economy rose 2.3 points in January to 56.6. The increase was led by the two most forward-looking components – orders and production – which registered gains of roughly seven points. The overall series remains below levels attained late last summer.

However, the current level of the index is consistent with 4.0% GDP growth. While no one anticipates 4.0% GDP growth this year, this index certainly seems to throw cold water on the notion that the pace of economic activity is succumbing to stock market gyrations, slower growth in China, tariffs, or rising inflation.

On the inflation front, the employment cost index rose 2.7% in the fourth quarter and 2.9% for 2018. Clearly, the seemingly tight labor market is forcing employers to pay up to attract the workers they need. That means that workers are receiving fatter paychecks and that is a good thing. At the same time some worry that rising labor costs will push the inflation rate upwards.

But thus far, there is no evidence that is happening because productivity growth is countering the increased labor costs. Unit labor costs, which measures labor costs adjusted for the increase in productivity, have risen just 0.9% in the past year – a 2.2% increase in compensation partially offset by 1.3% growth in productivity. The Fed has a 2.0% inflation target. If unit labor costs are rising by 0.9%, it is quite clear that the tight labor market is not putting upward pressure on the inflation rate.

It is also worth noting that the ISM price component for January fell 5.3 points to 49.6 after having declined 5.8 points in December. That is the lowest reading for the price component since February 2016 and suggests that the PPI for January will register a decline. Clearly, there is no hint that the inflation rate is on the verge of accelerating any time soon.

The stock market’s slide late last year was unnerving and suggested to many investors as well as economists that an economic downturn was likely by the end of this year. Our sense was that the economic fundamentals remained solid and that the selloff was nothing more than exaggerated stock market noise. We are breathing a sigh of relief that, perhaps, we are on the right track.

All these tidbits of information are restoring the faith of stock market investors. The S&P 500 index has recovered about 60% of what it lost during the fourth quarter and now stands just 7.5% below its previous peak level.

Percent of High and Low B-to-M Stocks in Largest Value and Growth Funds

Posted on February 7, 2019 by No Author -

Honorable Mention

Posted on February 7, 2019 by Editorial Staff -

Sweeping bipartisan retirement bill re-introduced

The Retirement Enhancement and Savings Act (RESA) has been reintroduced in the new Congress. The bipartisan bill introduced on Feb. 6 is sponsored by Reps. Ron Kind (D-WI) and Mike Kelly (R-PA), NAPANet reported.

The bill includes provisions intended to improve the retirement plan options available to small businesses by allowing unrelated employers to adopt a multiple employer plan (MEP). The legislation would give employers additional time to adopt a qualified retirement plan for the prior year up until the due date of the tax return (with extensions). The legislation provides for greater flexibility for a business to adopt a safe harbor 401(k) plan. The bill reduces the premiums charged to cooperative and small employer charity (CSEC) pension plans like the ones sponsored by some rural electric and agricultural cooperatives and the Girl Scouts.

The bill provides a tax credit of up to $5,000 to defray the cost of starting a retirement plan and adds an additional tax credit for plan designs with an automatic enrollment feature. It also enhances automated saving by removing the 10% cap on automatic employee contribution rate increases.

OneAmerica and Broadridge create CIT data resource

OneAmerica, in collaboration with Broadridge Advisor Solutions, has created a new website that offers an online repository of collective investment trust (CIT) for is retirement plan advisors who are considering CITs as an investment option for participants in their plans, according to a news release.

CITs are popular due to their flexibility and cost effectiveness, but a disadvantage that exists is “The inability to quickly and easily find information about the funds and important documents such as a declaration of trust” have slowed the adoption of CITs, OneAmerica said. The new online portal is designed to remedy that.

“The overhead associated with compliance and regulation [of CITs] isn’t as time-consuming as traditional mutual funds, therefore making them a cost-effective option for plans,” the release said.

OneAmerica is the marketing name for the companies of OneAmerica. The firm provides administrative and participant services for some 12,000 retirement plans with over $63 billion in assets under administration.

Empower launches Snapchat and Instagram campaigns

Empower Retirement, the nation’s second largest retirement services provider, has expanded its social media strategy to reach Generation Z and more millennials.

The firm has launched video campaigns on Snapchat, a mobile messaging application widely used by young adults, as well as Instagram Stories. Both campaigns speak directly to young adults ages 18 to 34 about the idea that it’s never too early to start saving for their future financial freedom.

Empower Retirement is among the first retirement services firms in the nation to take its message to Snapchat, which reported 186 million daily active users in Q3 2018. Pew Research Center reports that 78% of 18 to 24-year-olds use Snapchat and 71% visit the platform multiple times per day.

The first campaign features five new animated videos, developed by Empower, that have some fun with a “rare artifact” theme. The videos will run nationwide now through the end of February.

The second campaign provides financial “pro tips,” and allows users to “swipe up” for additional educational content. Both campaigns, designed vertically, specifically for Snapchat and Instagram Stories, are part of Empower Retirement’s expansive social media effort to continue an on-going conversation with millennial savers and start one with Generation Z (born from the mid 1990s to the early 2000s) about the importance of saving early. Longer videos will be featured on Facebook, Twitter and Instagram.

Empower has had previous success in connection with younger generations on social media. In its last Snapchat campaign the number of users in the 18 to 34-year-age range watching the entire video was nearly double the completion rate of other social media platforms.

Millennials (born between 1981 and 1994) are on track to replace 75% of their income in retirement compared to Generation X workers who are on track to replace 61% and baby boomers that are on track to replace 58%, according to an Empower Institute survey of 4,000 working Americans ages 18 to 65.4.

Equity funds rebound in January: TrimTabs

Retail investors jumped back into the equity markets in January, with all equity mutual funds taking in $11.0 billion in January, the most since February 2014, according to a TrimTabs Investment Research estimate.

The inflow of $3.3 billion into U.S. equity mutual funds was the most since February 2015, while the inflow of $7.8 billion into global equity mutual funds was the most since March 2018.

The buying in January came just one month after all equity mutual funds lost a record $89.3 billion in December. “Flows shifted dramatically last month,” said David Santschi, Director of Liquidity Research at TrimTabs.

“Mom and pop investors may simply have been chasing performance, or perhaps they were reassured by soothing words from central bankers or seeking out active management amid higher volatility.”

Equity exchange-traded fund flows fell sharply last month, TrimTabs noted in its research note. U.S. equity ETFs had their biggest monthly outflow on record, shedding $26.1 billion. Global equity ETFs issued $4.2 billion, their lowest monthly inflow since September 2018.

Oregon auto-IRA program gathers momentum

OregonSaves, a state-based, auto-enrolled IRA program for workers whose employers don’t offer retirement plans, reported milestones this week: $12.8 million in total savings so far, the receipt of an innovation award from Pensions & Investments magazine and the Defined Contribution Institutional Investors Association, and the testimony of an OregonSaves employer at a recent US House committee hearing on retirement security.

Luke Huffstutter, the co-owner of Annastasia Salon in Portland and one of the first small business owners to embrace OregonSaves, testified before the U.S. House Ways and Means Committee in a hearing focused on “Improving Retirement Security for America’s Workers.” The committee is chaired by U.S. Rep. Richard Neal, D-Mass., and includes U.S. Rep. Earl Blumenauer, D-Ore.

“OregonSaves is easy for my employees, but it’s also easy for me,” Hufstutter told the committee. “OregonSaves has changed the future for the people in my company. Please consider making it easier for other states to follow in Oregon’s steps.” His participating workers, almost all women, have saved an average of more than $2,200 each, he said.

OregonSaves provides an employment-based retirement savings option to an estimated one million Oregonians who lack the ability to save at work. It is overseen by the Oregon Retirement Savings Board and managed by the Oregon State Treasury.

Illinois and California launched their own state-based versions in the past year, and several other states and municipalities, including New York City, are considering similar programs. Local officials recognize that Americans have a collective retirement savings deficit of $6.8 trillion, and that an under-saved elderly population will put pressure on taxpayer-funded safety net programs.

OregonSaves is available for workers who lack a savings option through their employer, and individual Oregonians who want to sign up on their own at http://www.OregonSaves.com. Workers are automatically signed up, and have the ability to opt out at any time.

A recent poll that found more than 80% of Oregon’s population support for the program, which is rolling out in phases statewide. The current phase is for employers with between 20 and 49 workers. The program will finish the rollout phase at the end of 2020, and at that time will be available to workers at companies of any size, if those companies do not offer a different retirement savings option.

The combined savings of participants in OregonSaves is now increasing by more than $1 million a month, according to Feb. 1 data.

American International Group, Inc.

Net investment income

Life and retirement earnings

Life and retirement – Commentary

SA’s big idea

41 million visits per month

Not ‘investo-tainment’

‘You can beat the indexes’

Adapting to stagnation

Explaining early retirement

Murphy succeeds Reynolds at Great-West

AIG garners DALBAR awards

Investors flock to emerging market ETFs: TrimTabs

American Equity Investment Life

Prudential Financial

Lincoln Financial Group

Basic old age insurance (and health care)

Mandatory defined contribution

Mandatory annuitization

Sweeping bipartisan retirement bill re-introduced

OneAmerica and Broadridge create CIT data resource

Empower launches Snapchat and Instagram campaigns

Equity funds rebound in January: TrimTabs

Oregon auto-IRA program gathers momentum

Data Connection

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