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An FIA Designed By RIAs

With the new “ClearLine” fixed indexed annuity (FIA), Security Benefit Life and DPL Financial Partners have built a product based on what they heard first-hand from the registered investment advisory (RIA) firms that pay an annual administrative fee to be part of DPL’s nearly year-old commission-free insurance sales platform.

The DPL Financial platform is the creation of David Lau, formerly at Jefferson National Life. Security Benefit Life, now privately owned by Eldridge Industries LLC, whose CEO is former Guggenheim partner Todd Boehly, is one of a half-dozen insurers with products on the DPL platform.

Todd Boehly

The partnership represents a wager that, in a pension-less world. retiring boomers will, in growing numbers, begin to demand guaranteed income strategies from their fee-based advisors and that the most agreeable solution for advisors will be no-commission indexed annuities with living benefit riders.

ClearLine was custom-built for “pure” RIAs (those without broker-dealer affiliations or insurance licenses). Most FIA contracts tilt either toward higher growth or to a more generous lifetime income rider. In building ClearLine, Security Benefit used the premium freed up by stripping out the commissions to enhance both aspects of the product.

“We wanted something that would perform better than bonds as people are approaching retirement and de-risking, and to have principal protection for sequence risk, and then to allow people to turn it into income at the right time,” Lau (right) told RIJ this week.

(Despite the absence of a commission, the contract has a seven-year surrender period with a first-year charge of 5%. The surrender period allows the issuer to invest in longer-term bonds.)

The income rider on ClearLine costs only 50 basis points a year—half the usual fee—and can be elected only at issuance. Once income begins, the annual payout is simply a percentage of the account value. The percentages depend on the ages of the policyholders. At age 65, for instance, the annual payout rate is 5% of the account value for men, 4.8% for women and 4.3% for couples.

RIAs asked Lau for cheaper, simpler income riders. Security Benefit responded. “First we heard that ‘the riders are too complex,’ so we eliminated a rollup rate and a benefit base and introduced more competitive payout factors. The second message we heard was about cost. So we purposely lowered the cost of the rider,” Doug Wolff, president of Security Benefit Life, told RIJ in a phone interview.

RIAs wanted to offer clients inflation-protected income, so ClearLine’s payout rates automatically rise by two percent per year. “We heard that living benefits don’t keep pace with inflation and the customer loses purchasing power,” said Al Dal Porto, vice president, product development, at Security Benefit. “So we created the Rising Income Rider [guaranteed lifetime withdrawal benefit]. There’s a guarantee that the income will go up.”

Doug Wolff

RIAs also objected to the tax treatment of income from guaranteed lifetime withdrawal benefits (on non-qualified contracts), so Security Benefit found a solution it calls Income Power.

“The way living benefits are usually taxed, the gains come out first,” Lau said. “In this product, the gains and principal are coming out pro rata. So it’s tax advantaged. There are stipulations regarding how you do it. But, according to private letter rulings, you can treat the income as if the product had been annuitized.” In other words, the “exclusion ratio” can be used. That feature is not available for contracts purchased with IRA money.

Security Benefit Life is one of a limited shelf of insurers on the DPL platform, which includes Allianz Life, AXA, Great American, Great-West, Integrity and TIAA. Lau intends to offer a range of insurance products, including variable universal life and long-term care insurance, is expected to be offered on the platform.

The platform, which competes with the Envestnet Insurance Exchange and the RetireOne insurance platform, is not intended to be a portal to the entire universe of annuities. “We want some depth in each category, but we don’t want to be managing dozens of carrier relationships,” Lau told RIJ. “A limited offering is more compelling to RIAs; they want best-of-breed. We feel free to swap out to get the best.”

Al Dal Porto

Wolff and Dal Porto were asked if RIA advisors with no experience selling annuities would be able to “close” an annuity sale and obtain a client signature—an anxiety-producing process for all concerned. Since there’s no commission involved, there’s also less urgency to complete the process. On the DPL platform, the insurance agent employed by the platform is expected to be partner in that process.

“We assume that the IARs [investment advisor representatives who work at RIAs] are using our solution because they’re better than what the IAR is already using,” said Wolff, suggesting that a product substitution—an FIA for a bond fund, for instance—within the context of a holistic financial plan wouldn’t be as pressure-laden as an isolated sale. As for experience selling insurance, that’s what DPL’s in-house agents will bring to the table. “There’s no question that there’s a sales cycle. But that’s where the DPL insurance counselors come in. They’re independent, and that makes it work.”

FIAs have emerged as the most viable annuity product design, from a business perspective. The design doesn’t demand a lot of insurer capital, because it mainly invests in the insurer’s stable general account. At the same time, it generates enough potential upside—through equity derivatives—to pay for manufacturing, distribution, benefits, guarantees and profits.

On the other hand, FIAs still have a reputation for over-aggressive sales tactics that lingers from a period when only highly incented, lightly monitored, independent insurance agents sold them. RIAs and the advisors who work for them are required to act in their clients’ best interests.

© 2019 RIJ Publishing LLC. All rights reserved.

Ibbotson Taken to Task over Indexed Annuities

If you read the January 28 edition of Advisor Perspectives (AP), you know that Michael Edesess and Bob Huebscher published a kind of takedown of Roger Ibbotson’s year-ago endorsement of fixed indexed annuities. In a March 2018 white paper, Ibbotson portrayed FIA as a generally prudent financial instrument. Historically, he calculated, an FIA would have yielded about half a percent more per year than long-term government bonds (5.8% vs. 5.3%).

This week’s AP response was titled, “A Close Look at Ibbotson’s Research on FIAs.” Edesess, a mathematician, economist and author, and Huebscher, AP’s publisher, make it a bit personal. They “reasonably assume” that Ibbotson, whose Zebra Capital firm does business with Annexus, the FIA design firm, was “financially incented to present a favorable view of FIAs.”

Ibbotson

Edesess and Huebscher proceed to examine a 12-year, two-year point-to-point Athene FIA and conclude that an adept advisor could safely outperform it “by purchasing, every two years, a high-quality two-year corporate bond and a two-year SPY at-the-money call option—a call on the SPDR ETF, which tracks the S&P 500.” No doubt.

FIAs have always attracted controversy. When I first heard of equity-indexed annuities, as they were still called in the early 2000s, they epitomized the “wild west” of the financial world. Bob MacDonald, who helped create that reputation by using irresistible commissions, island vacations and other incentives to fire up independent insurance agents, was still CEO of Allianz Life of North America, the top seller of indexed annuities. MacDonald, an unabashed huckster, wrote a lively book called Cheat to Win (Paradon, 2005).

A favorable environment nourished the growth of then-EIAs. As interest rates bottomed out (under Greenspan) after the dot-com bust, edgy investors were jones-ing for yield, and indexed annuities could offer 100% principal protection and potentially higher gains than certificates of deposit if the S&P 500 Index rose.

Few people understood EIAs, though the basic design is not complicated. Most of the premium goes into the insurer’s general fund and a fraction of it is applied to the purchase of options on an equity index. Data collected by the top EIA analyst at the time, Jack Marrion, suggested that they could return an average of between 3% and 4% a year with no risk of loss.

At that time, before the 2008 financial crisis, indexed annuities were on the cusp of a 10-year odyssey involving not one but two cycles of execration and redemption. The first cycle peaked in 2007 when the EIA industry frustrated an SEC attempt to regulate them as securities. The second cycle peaked when Donald Trump ended the Department of Labor’s crusade to hold variable and indexed annuity transactions to a sales-chilling level of ongoing scrutiny.

The EIA, renamed a “fixed indexed annuity” or FIA after the SEC affair, has by now cemented its grip as the top-selling annuity product. It is sold not just by independent insurance agents but in channels, such as the broker-dealer channel, where it was once shunned. More and more insurers are building them. Champions of the product have been vindicated by rising sales.

The product had achieved enough respectability by early 2018 that the venerable Roger Ibbotson, founder of Ibbotson Associates and emeritus professor of Yale, published his white paper endorsing the concept. As endorsements go, it was not much more emphatic than the American Dental Association’s famous inscription on tubes of Crest toothpaste. But there it was.

Edesess

I won’t comment on Roger Ibbotson’s motives; I wasn’t in his shoes. Regarding the Edesess-Huebscher article, it’s no surprise that they found a securities market solution better than the FIA they selected. (They picked a high-value target: an FIA with an egregious 12-year surrender period. They might have analyzed one of the new no-commission FIAs, or the value of an FIA guaranteed income rider.)

An investment solution will beat an insurance solution every day of the week and twice on Sunday—unless the insurable event occurs. And, in a world of average outcomes, those events never occur. Guarantees are an expense, not an asset (though agents might characterize FIAs as assets).

Personally, I’m not susceptible to the charms of FIAs, which, as far as I can tell, behave with the reassuring predictability of a knuckleball. But I can see how, during periods of low interest rates and market uncertainty, they can be an attractive substitute for CDs, bonds or cash. They can also serve as a hedge against sequence risk for near-retirees, and as a source of guaranteed income. Important from a marketing perspective, FIAs give salesmen the magical “you’re safe either way” mantra that liberates indecisive people to sign irrevocable contracts.

No one should be shocked that insurers build them and distributors sell them. They’re cheaper (in terms of capital) to produce than variable annuities, while gathering similar lump-sum premia. For producers, they require only a state insurance license to sell and they pay handsome commissions. They generate enough profit to attract private equity companies. Have they been mis-sold? That’s why the Bush SEC and Obama DOL went gunning for them.

When we see heated clashes over FIAs, what we’re witnessing, in one sense, is a manifestation of the Mars/Venus conflict between the insurance and investment worldviews. The two are fundamentally different. The tailwind of insurance product sales is fear; greed is the tailwind of investment product sales. Insurers sell guarantees; investment companies sell risk. Insurance has actuaries; investing has quants.

To refine the point, let me share something that an insurance man I know, who sells indexed annuities, told me recently. This adage was significant to him. And he wasn’t the first insurance man to tell me this. Listen closely.

The best product is the one the client will buy,” he said. Think about that for a moment. The first time I heard it, I didn’t know how to respond. What did it mean? Was it a self-serving tautology? Was it a reference to “liberating indecisive people to act”? I’m not sure. But consider it a litmus test. If you sell investment advice, that motto will probably baffle you. If you sell insurance products, those may be words you live by.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

In Georgia, auto-enrollment faces legal challenge

The defined contribution pension situation in Georgia is less than peachy. That’s Georgia, the gorgeously rugged crossroads of Europe and Central Asia; not Georgia, the southern US state that eternally occupies Ray Charles’ mind.

In July 2018, the Georgia parliament passed a law requiring employers and employees to each contribute 2% of pre-tax pay to an investment fund. The government added 2% for those earning less than $9,040 per year and 1% for those earning $9,040 and $22,500.

Following the path of other European countries, the ruling Georgia Dream government wanted to supplement the nation’s $75-a-month universal old-age pension, which was financed from the state budget, with a mandatory, auto-enrolled worksite defined contribution plan with investments in supervised pension funds.

The new system is mandatory for all employees up to age 40 as of August 2018, and voluntary for those older than 60 (men) and 55 (women). Those in between can opt out within five months, but no earlier than three months. Participation is voluntary for the self-employed—more than half of Georgia’s workforce—who pay in 4% of their earnings.

Early challenge

But only weeks after the new pension law took affect at the start of 2019, it has been challenged in court. The Georgian Democracy Initiative (GDI), a human rights organization, claims it violates Articles 11 (Right to Equality) and 19 (Right to Property) of the Georgian Constitution, according to a report at IPE.com.

GDI argued that the system’s mandatory nature interfered with citizens’ property rights. It also challenged the 2% employer levy, which, unlike the employee portion, would not be returned in any way to the contributor. The campaign group also asked the court to rule whether the contributions qualified as a new tax. Under Georgia’s constitution new taxes must be first approved by a referendum.

The new law provides for three types of investment portfolio (high, average and low risk) with participants choosing their own portfolios or defaulting to one of the three depending on their age. Investment limits in both equities and foreign-currency denominated assets range from 20% for low-risk portfolios to 60% for high-risk ones. Prohibited investments include derivatives (except for hedging purposes) and real estate.

External bodies such as the International Monetary Fund have long supported the new system, including the establishment of the Pensions Agency, as a means of stimulating domestic savings and the local currency capital markets.

Dollarization

Georgia’s new system also aims to boost local capital markets and keep money in the country. The auto-enrolment law established a separate legal entity, the Pensions Agency, whose functions include administering the system and providing investment services. Participants can use either the agency or an approved financial company to manage all or part of their pension assets.

Dollarization in the economy, while on the decline, is still high, accounting for significant shares of loans and deposits. In other words, Georgians are exchanging their lari for dollars, a hard currency with universal acceptance, stable value and myriad investment opportunities.

As credit rating agency Moody’s stated last July: “The accumulation of pension assets will complement Georgian authorities’ efforts to tackle the issue of high dollarization in the economy and support a plan to develop domestic capital markets by introducing a demand element for long-term lari [local currency] assets.”

Investors start to sweat over global warming: MSCI

The business and financial implications of global warming are beginning to register on investors, some of whom now incorporate climate considerations into their portfolios, according to a new report from index and analytics provider MSCI.

While investors still hope “some combination of technology and policy forces will limit emissions going forward, such that we can avoid the worst outcomes of climate change,” the risk of this not happening is “working its way into investor thinking in 2019,” the report said.

Investors in less liquid assets, like coastal property, whose valuations are routinely linked to longer time-frames, tend to be most concerned. Real estate, according to MSCI, was “a prime example of an asset class that will inevitably be impacted by climate in the next decade.”

If global emissions peak before 2030 and emissions fall back to today’s levels by 2030, the problem can be managed, MSCI said. If not, the atmosphere’s temperature will have risen by 1.5°C by 2040, the limit above which coastlines would be inundated and drought intensified, triggering poverty and mass migration, according to the Intergovernmental Panel on Climate Change.

This report originated at IPE.com.

© 2019 RIJ Publishing LLC. All rights reserved.

Jackson National launches second fee-based version of Elite Access VA

Jackson National Life Insurance Company, the top seller of variable annuities in the US with more than $8 billion in sales in the first half of 2018, has launched a second version of its fee-based Elite Access Advisory investment-only variable annuity (IOVA) contract, whose first edition launched in early 2017.

Like its predecessor, the new contract, Elite Access Advisory II, is aimed at the fee-based, registered investment advisor (RIA) market. It differs from its immediate predecessor in a couple of ways. Where Elite Access Advisory I offered a three-year surrender fee period and a $10 monthly contract fee, Elite Advisory II offers no surrender period and a $20 monthly contract fee. Advisors can liquidate assets at any time.

The original B-share version of Elite Access, was launched in 2012. It made liquid alternatives—then a sought-after asset class because its performance was uncorrelated with that of stocks and bonds—accessible to the advisor market. Previously, only institutions such as endowment funds had access to such exotica. Jackson marketed the product aggressively—it even hired then-popular actor Ben Stein to promote it in handsome videos—and by 2014 it had zoomed to fifth place in variable annuity sales, with $1 billion in sales per quarter.

Today, sales of that product have cooled to about $500 million per quarter. In a steady bull market, its value proposition is weaker. But with the sudden return of stock market volatility in the last quarter of 2018, the appeal of volatility-buffering liquid alternatives may also return.

The earliest version of Elite Access also pioneered the so-called IOVA (“investment only variable annuities”) category, which distinguished VAs that was used mainly for tax-deferred trading and investing rather than for generating lifetime retirement income.

So far, Elite Access Advisory I does not appear to have broken into Morningstar’s list of the 50 best-selling variable annuity contracts. The new second edition, which has no surrender fee period, might generate more interest among fee-based advisors. The ability to sell its products to fee-based advisors has been and continues to be the number one distribution problem facing the annuity industry.

Jackson National, perhaps because of its acknowledged wholesaling expertise and brand strength, has succeeded in getting some traction in the fee-based space. Its relatively new Perspective Advisory II VA, a no-commission version of the industry’s most popular contract, had sales of $288 million in the first half of 2018. Jackson annuities will be available to RIAs on the new Envestnet Insurance Exchange.

Variable annuities do have a unique advantage, especially for high net worth investors. They remain the only instrument that allows individuals to invest a virtually unlimited of after-tax money for tax-deferred long-term growth as well as for tax-deferred trading. That’s important for those who have already reached maximum contributions to employer-based retirement savings plans and IRAs, and those who want to trade frequently without generating taxable gains.

According to a Jackson National press release this week, Elite Access Advisory II’s key features include:

Product cost: Monthly contract charge of $20 per month ($240 per year). There is no mortality, expense and administration charge, although the underlying investment subaccounts carry annual operating expenses.

No withdrawal charge: There is no surrender period and zero withdrawal charges. All or any portion of the contract may be withdrawn at any time prior to the Income Date. On contracts without a guaranteed minimum withdrawal benefit (GMWB), if the contract value remaining after withdrawal is less than $2,000, any withdrawal will be treated as a total withdrawal and the withdrawal value will be paid and the contract will terminate.

Compensation structure: Advisor compensation is fee-based, rather than commission-based. The contract has no mortality and expense (M&E) risk charges or administrative charges.

Investment freedom: More than 130 investment options are available. Investors may select up to a maximum of 99 investments and adjust options or allocations up to 25 times each contract year without transfer fees. To prevent abusive trading practices, Jackson restricts the frequency of transfers among variable investment options, including trading out of and back into the same subaccount within a 15-day period.

© 2019 RIJ Publishing LLC. All rights reserved.

Holy Annuities! RIJ Goes to Israel

Oy! I can’t fall asleep on airplanes, so I’ve spent most of my first week in the Tel Aviv area jet-lagged and miserable. The symptoms are flu-like: Headache, muscle ache, cough, dehydration and narcolepsy. My Israeli cousin’s two-bedroom apartment, loaned to me for a few weeks, is sufficient except in one way. When I flipped the red wall switch to turn the flash heater on, the circuit breaker blew.

Goodbye hot shower. Goodbye broadband. Fortunately, with the help of a neighbor, I found the electrical panel on the terrazzo landing, restoring precious WIFI. I haven’t retried the hot water switch yet.

I confess to having become a fair weather journalist. If it’s winter in east-central Pennsylvania, then you can bet that RIJ’s virtual offices will be far from there, someplace where the weather is mild and the local retirement financing system promises an interesting case study. Two years ago we relocated to Costa Rica for a month. Last year the destination was Seville, Spain. This year, it’s Israel.

To get sorted quickly in another country, I’ve developed a drill. It begins with a stroll around my new neighborhood. My experience with middle-class neighborhoods in Europe and Asia is that you can readily find small shops or stalls that sell the essentials: Bread, eggs, bottled water, wine, fresh vegetables, laundry and barbering services, and so forth. This busy understory of informal commerce (thriving below the skyline of banks, office buildings and apartments) usually includes small clubs and restaurants as well.

That’s been true of Yehud, the suburb east of Tel Aviv where I’m staying. But the mom-and-pop economy here looks endangered. Yehud is growing fast, with new luxury apartment towers rising amid grimy, laundry-hung apartment blocks from the 1970s and old, terra cotta-roofed stucco cottages from the preceding agricultural period. Underdevelopment is yielding to overdevelopment (i.e., gentrification) in real time. And the population seems relatively young. Children—in daycare centers, in strollers, in pairs walking home from school—are commonly seen and heard.

It’s a mother and child reunion, in Yehud.

But let’s stay on task. Retirement experts who know Israel, including Zvi Bodie, Moshe Milevsky and Meir Statman, have graciously furnished me with the names and email addresses of some of their contacts in academia, government and business here. I was able to find a few more on my own, including Shlomo Benartzi, the UCLA behavioral economist, author and consultant who divides his time between Israel and the US.

Wednesday morning, I reached the first of my contacts. Over Skype (I don’t have local cell service yet) I interviewed Jack Habib, recently retired as the director of research at the National Insurance Institute. Next week, I’ll meet over coffee with Orly Sade, a professor at Hebrew University, who recently wrote about the consequences of mandatory partial annuity purchases at retirement. On Sunday morning, I’ll have breakfast at Café Hillel in Jerusalem with Gil Weinreich, the former Research magazine editor who lives here now and works for seekingalpha.com.

Israel’s retirement policy pivoted in 2008. Workplace defined contribution (DC) plans became mandatory (though compliance is said to be incomplete among small firms). Workers contribute to pre-tax pension funds (which also provide disability and unemployment benefits), or to after-tax “provident funds,” or to a third option, called manager’s insurance (for high earners). Those who save in pension funds must use enough of their savings (since 2008) to buy an annuity paying about $1,200 a month; they can take the balance as a lump sum. That program is only 10 years old, so few people have reached the annuitization stage. I could be wrong on a few of these details–it’s confusing.

In addition to these “occupational schemes,” there’s a basic old age pension, akin to our Social Security. It provides 1,554 shekels ($423) per month for individuals and 2,335 shekels ($635) per month for couples. There are also supplements and adjustments for various situations. As in the US, many retirees, including former government workers and career military personnel, still receive defined benefit pensions from closed or ongoing plans. And there’s personal savings and investment, of course.

Between interviews and deadlines, I hope to visit some of the sites that so many have fought over for so long: Jerusalem, the Dead Sea, Masada, Beer Sheba and the Negev desert in the south, and Haifa, Acre, and the Sea of Galilee in the north. I arrived knowing little more about contemporary Israel than what I’ve seen in the American news media; only gruesome events in the Middle East tend to get coverage. So far, the reality seems busy but peaceful—at least in this middle-class suburb, mid-way between Tel Aviv and the West Bank frontier.

© 2019 RIJ Publishing LLC. All rights reserved.

iShares collect $36.1 billion in December: Morningstar

In December, long-term U.S. funds had their greatest monthly outflows since October 2008 at $83 billion, and inflows for the year were the lowest since 2008. Money market funds saw inflows of $57 billion, for their best year since 2008, according to the Morningstar Direct Asset Flows Commentary for December and the year ending December 31 2018.

But it wasn’t a simple tale of flight-to-safety triggered by fourth-quarter volatility. U.S. equity funds, in fact, showed inflows of $14.1 billion. Investors were moving from active funds to passive ones. Investors pulled a record $143 billion from actively managed funds while moving $60 billion to passive funds.

In other highlights from the report:

  • December outflows spanned asset classes, with U.S. equity funds the only major group showing significant inflows—$14.1 billion despite December’s sell-off. On balance, these inflows went to passive funds. For all of 2018, long-term funds collected $157 billion in inflows, less than half the $350 billion average for 2008-17.
  • December’s outflows mostly came from actively managed funds, with investors pulling a record $143 billion, while passive funds collected nearly $60 billion in inflows. American Funds suffered the most with $8.7 billion in outflows, the fund family’s most since December 2011.
  • Taxable-bond funds had their greatest outflows since June 2013, $43 billion, as investors continued to cut credit risk and seek shelter among high-quality, short-duration vehicles. Intermediate-term bond funds got hit hardest with $17.0 billion in outflows, the Morningstar Category’s worst month since August 2013.
  • International equity, sector equity, allocation, and alternative funds all had their greatest outflows in at least 10 years in December.
  • iShares dominated December flows with a firm-record $36.1 billion, more than triple that of runner-up Vanguard’s $11.4 billion in inflows. Vanguard still came out ahead for 2018 with nearly $161 billion in inflows to iShares’ $136 billion.

© 2019 RIJ Publishing LLC. All rights reserved.

Notable Retirement Research of 2018

Hundreds, maybe thousands, of academic papers in the field of retirement finance are written, presented at conferences, and published in journals every year, and it grieves me to know that I don’t even hear about most of them, let alone get a chance read them. But I try to keep up.

Here are ten of the articles that I read in 2018 that held my attention all the way through. Most of them came from the National Bureau of Economic Research, which sends me links to a fresh batch of its “working papers” twice a month or so. All of them made me look at the world, or at least the financial and retirement worlds, in a new way. I tried to condense them without losing the gist. You’re bound to find at least one or two of them useful.

We Can Build Better Retirement Products, But Will Anyone Buy Them? by Joseph A. Tomlinson.

Tomlinson, an advisor and actuary, proposes three income-enhancing products that retirees need but can’t find today: A bond ladder that would finance a delay of Social Security benefits to age 70; a single premium immediate annuity (SPIA) that offers inflation-protection for 11% less than the current cost; and a SPIA with accelerated benefits for medical expenses.

Social Security delay product

In a hypothetical case, Tomlinson imagines a 66-year-old individual with $750,000 in a 401(k) wants to retire immediately but delay Social Security claiming to age 70, when the benefits will be 32% higher ($31,680 vs. $24,000). To bridge the gap, an investment company could offer a ladder of Treasury Inflation Protected Securities (TIPS) at age 66 that would provide inflation-adjusted income until age 70. Assuming zero yield on TIPS, the TIPS ladder would cost about $127,000 and payout an inflation-adjusted $31,680 each year.

Improved inflation-adjusted SPIA

To support inflation-adjusted SPIAs less expensively, Tomlinson writes, life insurers could combine a non-inflation-adjusted SPIA with swap transactions that would substitute TIPS for regular Treasury bonds. The effect would be to create synthetic inflation-adjusted bonds with the same credit-spreads that insurers achieve on their regular fixed-income investing. Instead of costing $298,000, a $13,320-a-year inflation-adjusted SPIA would cost about $265,000. That’s a price reduction of 11% or $33,000 more liquidity for the retiree.

Life Care Annuity

Borrowing an idea from economist Mark Warshawsky (relias.com), Tomlinson proposes a standard SPIA but would pay an additional pop-up monthly income if the annuitant needed long-term care (that is, lacked two or more activities of daily living or suffering significant cognitive impairment and needed at least 90 days of care). The pop-up income could be set to double or triple the basic SPIA payouts, and the product could be offered with minimal underwriting because of the close correlation between potential LTC need and diminished longevity. “It might well be feasible to build a product that would be competitive with today’s inflation-adjusted SPIA pricing and provide the significant addition of an LTC pop-up benefit,” Tomlinson writes.

The Imbalances of the Bretton Woods System 1965 to 1973: US Inflation, the Elephant in the Room, by Michael Bordo.

Do you remember August 15, 1971? Richard Nixon ended the gold standard that day. Faced with rising inflation, a growing trade deficit, and the costs of the Vietnam War and Great Society social spending, he hoped to avoid raising interest rates and, in turn, avoid a recession.

The maneuver, which ended the Bretton Woods agreement, helped Nixon win reelection in 1972. But the next decade was financially ugly: a weaker dollar, the Arab oil embargo, the bear market of 1974-75, a rising cost-of-living, Volcker’s defibrillating rate shock and the 1982 recession. Who knew it was the prelude to a sensational bull market?

Michael D. Bordo, a noted economic historian, was teaching a class at Rutgers the day Bretton Woods collapsed, and urged his students to mark the calendar. In this paper, he compares and contrasts the situation then and now. Again, a US president is toying with tariffs and blaming foreigners for a trade deficit. Again, the dollar’s privileged status as the global reserve currency is at stake. Goldbugs should read this paper. So should someone in the Oval Office.

The Power of Working Longer, by Gila Bronshtein, Jason Scott, John B. Shoven, and Sita N. Slavov.

“Take this job and shove it.” There was a time when people, especially youngish people not yet resigned to the grindstone, enjoyed saying that. But they are oldish now, and, in many cases, feeling pressure to work far into their 60s, so they can save more, spend less, let their shares appreciate and maximize their Social Security benefits.

But this paper has good news for people who didn’t save enough for retirement. By working only three to six months longer, and claiming Social Security later, a person could boost his or her retirement income by as much as increasing retirement contributions by one percentage point over 30 years of employment.

For a 62-year-old, working until age 70 would increase retirement income by at least 40%, and for some individuals by more than 100%. “Deferring retirement by one year allows for an 8% higher standard of living for a couple and the subsequent survivor. The effect compounds for two, three, and four-year work extensions,” the authors write.

“The results are unequivocal,” they add. “Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer. The longer work can be sustained, the higher the retirement standard of living.” (In this case, standard of living is measured by the amount of purchasing power a same-age couple would have if they converted their savings at age 70 to an inflation-adjusted joint-life single premium immediate annuity.

The act of waiting to claim Social Security, as opposed to saving more in one’s 60s or giving investments a few more years to grow, turns out to the game-changer for the under-saved. Claiming Social Security at 66 instead of 62 increases retirement living standard by about one-third, the paper shows. Claiming at 70 instead of 62 increases the retirement living standard by almost 75%. The greater a person’s reliance on Social Security for retirement income, the greater he or she can benefit from retiring later.

A lower-wage worker needs to work only 2.1 months longer to equal the benefit of 30 years of saving an extra percentage point of income. A higher wage earner has to work 4.4 months longer to get the same benefit.

Any advisor who wants to show clients how much they can benefit from working longer and delaying Social Security will find this paper valuable.

Psychology-based Models of Asset Prices and Trading Volume, by Nicholas C. Barberis.

Every time someone announces the death of active fund management, someone else invokes Mark Twain and says its demise is highly exaggerated. In a new paper about the psychology that helps drive capital asset prices, Nicholas C. Barberis of the Yale School of Management, comes down in favor of active management.

“An active trading for rational investors, one where investors tilt their portfolios toward low price-to-earnings stocks and gently time the stock market to take advantage of return predictability” is the path to better returns, Barberis writes. As the paper unfolds, you realize that he’s making a case for factor-based investing without saying it too explicitly.

Referring to factor-based funds, he writes, “New financial products have appeared that exploit mispricing” by mechanically buying and selling assets with these characteristics, which have “genuine predictive power.” (See below. The plus and minus signs indicate positive or negative predictive power):

  • Past three-year return –
  • Past six-month return +
  • Past one-month return –
  • Earning surprise +
  • Market capitalization –
  • Price-to-fundamentals ratio –
  • Issuance –
  • Systematic volatility –
  • Idiosyncratic volatility –
  • Profitability +

“Factor-based funds may be an attractive addition to a portfolio over and above index funds,” he told RIJ in an email. He refrains from mentioning factor investing in the paper, however, but he recommends them “so long as the fees are low, of course. My understanding is that some of these products do have low fees now – but not all, so some care is needed.”

The paper also describes Barberis’ search for a “unified psychology-based model of investor behavior might take.” He reviews existing literature on behavioral finance and concludes that such a model might combine “extrapolative beliefs” (where expectations about the future are based on past experience) and “gain-loss utility” (the idea that losses hurt more than gains feel good)—a pairing on which little work has been done, he writes.

The Life Expectancy of Older Couples and Surviving Spouses, by Janice Compton and Robert A. Pollak.

When working with retired couples, advisors face longevity uncertainties that are more complex than when they work with single retirees. Past research shows, and you’ve probably heard, that there’s a 25% chance that one member of a couple will reach age 90. For that reason, some advisors plan on a 25-year retirement after age 65.

But how long is a couple likely to live together in retirement before one dies (i.e., their joint life expectancy)? And how long might the survivor live as a widow or widower (i.e., the survivor life expectancy)? These are slippery projections, and the authors of this paper, “The Life Expectancy of Older Couples and Surviving Spouses,” try to get a reasonably firm grip on them.

For couples, analogous measures are the expected years both spouses will be alive (joint life expectancy) and the expected years the surviving spouse will spend as a widow or widower (survivor life expectancy).

In a hypothetical example, the authors consider a wife, 60, whose husband is 62. In 2010, her life expectancy at that age (the national average) was 24.5 years and her husband’s 20.2 years. But according to this paper, the couple’s joint life expectancy is only 17.7 years. And while her life expectancy is only four years longer than his, if he dies first (a 62% probability), she can expect to live 12.5 more years, to age 90, on average. If she dies first (a 38% probability) he can expect to live another 9.5 years, to 89, on average.

“Using individual life expectancies to calculate summary measures for couples yields substantially misleading results because the mortality distribution of husbands and wives overlap substantially,” the authors write.

Advisors can use these figures to show couples when, on average, the lesser of their Social Security payments could end, and how they might offset the shortfall. Discussions about mortality aren’t easy, but they can be empowering. These figures, interestingly, do not substantiate the perception that elderly couples often die in rapid succession. The averages do suggest that couples should plan for five more years of income than single people.

The Pivotal Role of Fairness: Which Consumers Like Annuities? by Suzanne B. Shu, Robert Zeithammer, and John Payne.

If you’re an advisor, you’ve surely encountered new clients who say, though perhaps not in so many words, “I’ll buy almost anything you recommend–except an annuity.” Depending on how you roll, you might either avoid the topic altogether or try to overcome their resistance.

But that begs the question: Why are they so resistant? Or, perhaps more constructively, how might an advisor tell which clients would be receptive to an annuity purchase?

In this paper, retirement researchers at UCLA and Duke find that older Americans who perceive annuities to be “fair,” who are concerned about being a burden to their children, and who are relatively less loss-averse, are the ones most likely to buy them.

“By far the strongest of all the individual differences we measured at predicting liking of annuities is the question of whether the individuals think annuities are ‘fair,’ wrote Suzanne Shu and Robert Zeithammer of UCLA and John Payne of Duke, three long-time contributors to research on the so-called “annuity puzzle.”

“From a positive perspective for marketers of these products… this suggests that the annuity puzzle [i.e., the low demand for longevity insurance among retirees] is more a problem of perception that of the financial tradeoffs inherent in the product,” they wrote.

They said that their research conclusions might be useful “for financial planners hoping to help their customers with [their] decumulation challenges.”

To determine perceptions of fairness, the authors first asked several hundred Americans ages 40 to 65 if they considered annuities “Completely unfair,” “Acceptable” or “Somewhat Unfair.” Then they asked them to indicate if they agreed or not with the following statements.

  • I feel like I understand the life annuity market well.
  • The system behind life annuities should be changed.
  • I would avoid companies that sell life annuities if I could.
  • It is clear where the money for this product comes from.
  • It is fair that the company is allowed to keep the excess funds.
  • I feel that I would have too little control over my retirement money if I bought an annuity.

“Prior research on consumer fairness has suggested that judgments of fairness are affected by the way that profits are shared between the firm and consumer, the intentions of the firm, the firm’s perceived wealth and power, and whether underlying costs are variable or fixed. In this project, our fairness measure was a simple one taken directly from Kahneman, Knetsch, and Thaler (1986),” the paper said.

Receptiveness toward annuities was found to be higher among the relatively less loss-averse and those who had a strong wish to protect their heirs. “Survey respondents… who clearly identify a family member as a potential beneficiary are significantly more likely to select annuities,” the paper said. “This intriguing result could suggest instead that individuals who are worried about becoming a burden on family are more open to the idea of annuities.”

Belief Disagreement and Portfolio Choice, by Maarten Meeuwis, Jonathan A. Parker, Antoinette Schoar, and Duncan I. Simester.

It’s well known that people tend to behave less than rationally with their money. Investor behavior after the election of Donald Trump in November 2016 provided fresh evidence of that to three MIT professors, who carefully studied investing trends in the months after that election.

Republican and Democratic investors alike could have seen, objectively, that the economy was likely to boom under a president who favored lower taxes and fewer regulations, the authors hold. In the year after the election, the Dow Jones Industrial Average grew 28.5%, from an already record-breaking base.

But while Republicans shifted into equities after the election, Democratic investors shifted measurably into bonds. The researchers were perplexed. They clearly didn’t think that the Democrats’ gloominess about Trump’s long-term effect on American democracy and the health of the biosphere would overwhelm their investing acumen.

“Our main finding is that (likely) Republicans increase the exposure of their investments to the US stock market relative to (likely) Democrats following the election. Democrats increase their relative holdings of bonds and cash-like securities,” the authors wrote.

In theory, market participants typically agree about the probability of different states of the world, the researchers wrote. But, in practice, they showed, different people have different “models of the world,” and make investment decisions on that basis.

The study was based on trading activity by individual retirement account holders at an unnamed major financial institution. Their average household income was $101,600 and the median was $78,000. The average investor in the study had $156,500 in investable wealth, of which 81% was in retirement accounts. The researchers did not include the wealthiest or poorest 10% of the population. The sample captured 40% of the US population and 47.3% of retirement wealth.

Swimming with Sharks: Longevity, Volatility and the Value of Risk Pooling, by Moshe Milevsky.

Moshe Milevsky, the well-known annuity expert at York University’s Schulich School of Business, introduces the fictional characters Heather (in glowing health) and Simon (in miserable health) to illustrate the point that people without long life expectancies can still get value from broad-based pensions like Social Security—but not as much from individual retail annuities, which are purchased voluntarily.

Even though healthy people receive more on average from a defined benefit (DB) pension system like Social Security—the healthy obviously live longer and collect benefits longer—shorter-lived people still get an important benefit because their life expectancies are less predictable, statistically speaking. Ironically, this gives them more “longevity risk” than healthy people, whose death rate clearly spikes in the mid-80s.

The message is timely. The US approaches a reckoning over Social Security reform. As policymakers contemplate raising the initial age of eligibility (62) and or the full retirement age (67) to save money, the impact on people with shorter life expectancies will be an issue. Meanwhile, many individual Boomers (of varying life expectancies) have difficulty gauging if retail annuities are a “good deal” or not. This paper can inform discussions of both issues.

Should the government be paying investment fees on $3 trillion of tax-deferred retirement assets? by Mattia Landoni and Stephen P. Zeldes.

A $16 billion annual federal subsidy for the asset management industry is hidden inside our system of incentivizing retirement savings with tax-deferral, according to this paper. That’s roughly the amount of revenue, the authors say, that the fund industry would not be collecting in fees if the US used a Roth-style system where contributions to retirement accounts were taxed up front rather than after age 70½.

“Record keepers, asset managers, and financial advisors charge fees for running retirement plans, managing assets, and advising clients,” write Landoni, of Southern Methodist University, and Zeldes, of Columbia. “These fees are typically charged as a percentage of assets under management (AUM). By deferring tax revenue with a traditional scheme, the government pays investment fees on the substantial amount of assets that sit in retirement accounts waiting to pay future taxes.”

The authors estimate that “substantial amount” at about $3 trillion. “The U.S. government’s implicit account is large,” according to the paper. “We estimate its size as the total amount of tax-deferred assets in DC plans and IRAs ($14.4 trillion) times 20%, a reasonable estimate of the average marginal tax rate in retirement, leading to our title figure of $2.9 trillion of retirement assets.

“We conservatively estimate fees to be about 72 basis points (bps) based on the lowest asset-weighted figures available. We assume that 21% of fees paid by the government are recovered via corporate taxation of the asset managers. Multiplying $2.9 trillion by .72%×(1 – .21), we reach our estimate of $16 billion per year—a cost for the government, and an annual subsidy to the asset management industry.”

How Persistent Low Expected Returns Alter Optimal Life Cycle Saving, Investment and Retirement Behavior, by Vanya Horneff, Raimond Maurer, and Olivia S. Mitchell.

After the 2008 financial crisis, the Fed reduced interest rates to historically low levels. Not long after that, the public’s interest in maximizing Social Security benefits seemed to spike and advisors touted their expertise in Social Security claiming strategies. That was no coincidence, according to the authors of this paper.

“When expected returns are high, the worker can claim early Social Security benefits without needing to withdraw as much from his retirement assets which continue to earn higher returns for a while longer,” write Olivia Mitchell, the director of the Pension Research Council at the Wharton School, and her German co-authors.

“But when the real interest rate is low, a worker can delay claiming Social Security in exchange for higher lifelong benefits, and the cost of taking more from his retirement account to support consumption is lower. …By delaying claiming, people can maximize the actuarial net present value of their lifetime Social Security benefits in times of low returns. But when returns are higher, claiming early maximizes the net present value of benefits.

The incentive to work and save is higher when interest rates are higher, they find. “When the interest rate is low, people work fewer hours per week early in life, compared to workers in the higher interest environment. For example, women work two hours per week less between ages 25-60 than they do in the two percent [real] interest rate scenario. The reason is that, in the higher return scenario, it is more attractive to build up savings early in life as these can grow at the higher rate.

“More work effort then generates higher labor income, and because of the progressive tax system, this results in a larger allocations to the tax-exempt retirement accounts. In addition, returns earned on assets held inside the 401(k) plan are tax-free. This second ©advantage is, of course, smaller in a zero return environment. Accordingly, when interest rates are low (or high), workers devote more (or less) of their savings to non-retirement accounts.”

© 2019 RIJ Publishing LLC. All rights reserved.

Jackson and RetireUp partner on annuity illustration tool for advisors

Jackson National Life, the leading seller of variable annuities, and RetireUp, the retirement income planning software provider, are partnering on a “Purpose Meets Planning” illustration tool that appears on Jackson National’s website and serves as a “conversation starter” for advisors and clients.

The Purpose Meets Planning tool is now available on Jackson’s Digital Advisor Success Hub (DASH). It is intended to generate interest in Jackson National annuities and in the RetireUp’s retirement planning software among advisors.

The tool allows visitors to the page to see the impact of devoting part of a hypothetical investor’s portfolio to a variable annuity with a lifetime income rider. There are three hypothetical unmarried investors: a 65-year-old, a 55-year-old, and a 45-year-old.

Users of the tool can manipulate “sliders” to the adjust the amount of monthly income the investors need in retirement, that amount of savings they have, and the percentage of their taxable or tax-deferred accounts that they want to apply to the purchase of a variable annuity with an income benefit. The tool then shows if and to what extent the addition of lifetime income to the portfolio reduces each retiree’s risk of running out of money.

“Purpose Meets Planning is targeted to planning-focused advisors trying to visualize what retirement looks like, with or without the benefit of an annuity,” said Dev Ganguly, Jackson’s senior vice president and chief information officer, said in a press release.

RetireUp’s algorithms were chosen to power Jackson National’s wizard after RetireUp participated in a Jackson “Hothouse competition.” The competition is a “creative problem-solving methodology” that Jackson employs to encourage teamwork, innovation and agility.

Six competing cross-discipline teams were given three days to develop a working software prototype for Jackson advisors. A panel of judges that included customers and members of Jackson’s executive leadership team scored the prototypes. RetireUp was part of the business solution voted best among the teams that participated in the invitation-only event.

Based in Libertyville, Illinois, RetireUp creates integrated retirement income planning solutions designed to engage clients and strengthen the client-advisor relationship. RetireUp technology platforms present complex concepts as easily understood numbers and graphics, using actuarial-level product modeling, data integration and an automated forms system to streamline the planning process.

RetireUp president and chief sales officer Michael Roth told RIJ this week that the partnership with Jackson National was the first where RetireUp “provided a custom API integration” with an annuity issuer to create a simple engagement tool on its website. “This is a lighter version of what we do,” he said. “It’s meant to be a simplified view to let advisors see the value that an annuity can provide for their clients.”

But his firm has recently formed partnerships with AXA, Brighthouse Financial and Great-West Financial and built their annuity product specifications into the RetireUp Classic and RetireUp Pro income modeling tools, which RetireUp licenses to independent advisors, captive agents, broker-dealers, registered investment advisors and insurance marketing organizations.

“We’re a goal-based platform,” Roth told RIJ. “We focus on the clients’ essential needs, and you can add new goals or expenses on top of that. We aim for income stability. We want the planning conversation to illuminate all of the risks that retirees can face. The client’s fundamental question is, ‘Can I retire?’ We ask, ‘How can we help them mitigate those risks and stabilize their income.’”

© 2019 RIJ Publishing LLC. All rights reserved.

New York proposes public-option IRA by 2021

Mayor Bill de Blasio to New York City’s small employers: Fuggedabout not offering your employees access to a retirement savings plan at work.

Aiming to make New York the “fairest big city in America,” New York’s mayor announced that he will work with City Council to pass legislation this year requiring employers with five or more employees to either offer access to a retirement plan or auto-enroll their employees in the city plan with a default Roth IRA contribution of the employees’ own earnings of 5%, which the employer can adjust.

Fewer than half of working New Yorkers have access to a retirement savings plan at work and 40% of New Yorkers between ages 50 and 64 have saved less than $10,000 for retirement, Mayor de Blasio said in a release.

For several years, some of America’s state and local officials have worried that a growing population of under-saved Boomers could overwhelm their public assistance resources. With policymakers and private innovators both unable to entice more small employers to offer plans voluntarily, states like California, Washington and Oregon, and now New York City, have advanced their own mandatory savings initiatives.

According to a fact sheet on the New York City proposal:

Employees will be able to choose from a limited menu of low-cost investment options.

The city will create a Retirement Security Fund to be overseen by a board of appointees, managed by a private third party administrator and invested in low-cost indexed mutual funds.

Although the city will subsidize start-up costs, the program will be financed by “low fees” charged to participant accounts.

In 2016, New York City Comptroller Scott M. Stringer unveiled a similar city-run retirement plan for private sector workers, including a city-sponsored multiple employer plan (MEP), but the idea lapsed after President Trump reversed the Obama DOL’s decision to exempt state and local auto-IRA programs from federal oversight.

The proposal must be approved as legislation by the City Council. If it is approved this year, the program would be open to participation by 2021.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

iPipeline processes 240,000 annuity transactions in 2018

iPipeline, a provider of cloud-based software for the life insurance and financial services industry, announced a record increase in the number of annuity transactions processed with their AFFIRM for Annuities product in 2018.

AFFIRM for Annuities is used by 35,000 advisors at large financial institutions to execute order entries for variable and fixed indexed annuities.

AFFIRM for Annuities expedites the order-entry process with customized workflows and suitability reviews, enabling financial institutions to meet FINRA, SEC and state compliance requirements.

“The total number of annuity transactions processed through AFFIRM has grown to over 240,000 with total deposits in 2018 reaching $31 billion,” said Tim Wallace, CEO, iPipeline, in a news release.

Fixed indexed annuity sales hit a record quarterly high of $54.9 billion in the third quarter of 2018, according to the Insured Retirement Institute (IRI). “The demise of the DOL fiduciary rule last spring, changing economic conditions, and the broadening acceptance of our next-generation order-entry solution account for much of the increase in transactions and total deposits,” Wallace said in the release.

iPipeline’s Connections 2019 User Meeting & Conference will be held at the Aria Resort & Casino in Las Vegas from March 17-19.

Duke University settles ‘excessive fee’ lawsuit

Schlichter Bogard & Denton, a leading national law firm based in St. Louis, this week filed a preliminary settlement approval motion on behalf of Duke University employees and retirees, in their suits against the university involving their 403(b) retirement plan.

The plaintiffs in the cases, filed in August 2016 and August 2018, sued for alleged breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The settlement terms include the creation of a $10.65 million settlement fund for the plaintiffs, as well as non-monetary relief.

The complaints, David Clark, et al., v. Duke University, et al., and Kathi Lucas, et al., v. Duke University, were originally filed in the U.S. District Court in the Middle District of North Carolina.

The case was among the first cases ever filed against a university alleging excessive fees. Schlichter Bogard & Denton also filed the first cases over excessive fees in 401(k) plans.

The complaints alleged that Duke University breached its duties of loyalty and prudence under ERISA by causing plan participants to pay excessive fees for both administrative and investment services in the plan. Duke denied it committed any fiduciary breach in its operation of the plan.

Besides the financial compensation, Duke agreed for a three-year period to: hire an independent consultant regarding bids for recordkeeping services; ease the ability of participants to transfer their investments out of frozen annuity accounts; analyze the cost of different share classes of mutual funds considered for inclusion in the plan; and avoid the use of plan assets to pay salaries of Duke employees who work on the plan.

Oceanwide-Genworth merger moves ahead

In connection with the merger of Genworth Financial, Inc., and China Oceanwide Holdings Group Co., Ltd., the New York State Department of Financial Services (NYDFS) has approved the proposed acquisition of New York-domiciled Genworth Life Insurance Company of New York by Oceanwide affiliates.

Genworth and Oceanwide extended their merger agreement to January 31, 2019 for additional regulatory review.

The two firms have entered into a letter agreement with the NY DFS, acknowledging certain additional requirements relating to cyber-security matters and the protection of customer information. Genworth and Oceanwide have undertaken an Enhanced Data Security to satisfy requirements of the Committee on Foreign Investment in the United States.

With NY DFS’ approval, the transaction has received all required U.S. insurance regulatory approvals. Closing remains subject to other regulatory approvals in China, Canada and by the U.S. Financial Industry Regulatory Authority (FINRA).

© 2019 RIJ Publishing LLC. All rights reserved.

Annuities, RIAs and ‘Cargo Cult’ Thinking

Brighthouse Financial announced this week that it will offer the no-commission version of its Shield Level Select structured annuity through the Envestnet Insurance Exchange (iX). Advisors who use Envestnet’s turnkey asset management platform (TAMP) can use iX to add annuities to their clients’ financial plans.

In joining iX, Brighthouse follows Jackson National, the top variable annuity issuer, Allianz Life, the top indexed annuity issuer, and Global Atlantic, who put products on the platform last year. Envestnet, whose TAMP is widely used in the RIA [registered investment advisor] market, launched iX in mid-May 2018.

Envestnet claims that iX (powered by Fiduciary Exchange software) represents a technical leap forward in annuity sales processing. Advisors whose enterprises use the Envestnet TAMP will be able to access iX and its shelf of annuities through their desktops. iX is said to give insurance-licensed advisors the tools they need to integrate annuities into wealth management plans with unprecedented ease.

“We believe that [the RIA advisor] audience is ready for annuities. Our research shows that if we make the [transaction] process easier, then they’ll use the product,” Alan Assner, head of annuity product development at Brighthouse Financial, told RIJ this week.

The Shield product is a structured indexed annuity that offers exposure to equities through investments in options on equity indexes, rather than direct investment in equities. This type of product offers more upside potential (but less downside protection) than a conventional indexed annuity and more downside protection (but less upside potential)  than a variable annuity. It is designed to protect a portion of a client’s savings from the full impact of a steep loss over a one, three or six-year term.

Anyone with an interest in the future of the annuity market should pay attention to what’s happening on all of the new platforms that strive to expand annuity sales among RIAs. Besides iX, these include the no-commission annuity platforms created in 2018 by DPL Financial and RetireOne.

Such platforms aim to eliminate a couple of perceived advisor objections to annuities: difficulty executing sales and integrating products into their workflow. Annuity issuers have long believed that if annuities look like “just another asset” to advisors, then more advisors will begin to use them routinely.

Or this could be a case of “cargo cult” mentality among annuity issuers. This term refers to a mode of wishful thinking that, by definition, involves a misunderstanding of the cause of a phenomenon and a fervent belief in the wrong solution. In this case, the annuity industry wants to believe that inconvenience alone—rather than the illiquidity, cost, and complexity of the products—prevents more fee-based or fee-only advisors from using annuities.

Time will tell. Either way, as more savings flows from the broker-dealer to the RIA channel, annuity issuers can’t risk being left out of that space. And Envestnet represents a pipeline to RIAs. At the end of 2017, Envestnet’s total platform assets reached about $1.4 trillion in nearly seven million accounts overseen by nearly 60,000 advisors, according to a report last year by benzinga.com.

Talking to Envestnet

Last fall, RIJ conducted a brief email interview with Bill Crager, president of Envestnet and leader of the Envestnet Insurance Exchange. Here are his written responses to our questions:

RIJ: What specific technological issues have had to be overcome on the path to integrating investment/insurance planning, and what hurdles are left on the path to full integration or so-called “straight-through processing” for annuities?

Bill Crager

Crager: There were numerous technological challenges that we’ve worked with FIDx to overcome across the managed account continuum from risk scoring through performance reporting. This industry-changing technology fully integrates annuities into our ecosystem creating a seamless process for our enterprise clients and their advisors to incorporate guaranteed income solutions into their practices. Post our year-end release, our 2019 roadmap features numerous enhancements, such as in-force transaction processing, as we continue to work with FIDx to modernize annuity distribution.

RIJ: I’ve heard that there may be some state-regulatory ambiguity about a non-insurance-licensed RIA’s ability to recommend insurance products and be compensated for it; what is your knowledge of this legal issue?

Crager: We are actively listening to our RIA clients as to how they want to grow their practices and working with legal and compliance experts to best accomplish this objective. In the end, each firm will need to determine how best to manage various regulatory obligations related to sales and compensation.

RIJ: Could RIAs be more interested in using the platform for 1035 exchanges out of annuities, a la Ken Fisher, than in becoming net buyers of annuities?

Crager: We expect to see some 1035 activity on the platform for annuities where it’s in the client’s best interest. We recognize that there is a dichotomy between RIAs recommending annuities and consumer demand for guaranteed income solutions. Our new Insurance Exchange as well as carrier product development with a focus on simpler, fee-based products will help those RIAs who want to provide guaranteed income solutions to their clients.

RIJ: Has the defeat of the Obama DOL fiduciary rule removed some of the impetus/need for a platform for no-commission annuities for RIAs?

Crager: We are still seeing significant growth trends in the advisory business including fee-based annuities with Aite Group predicting that at least half of all client assets will be in fee-based programs by 2025. Supporting this trend, recent LIMRA data has shown that fee-based annuity sales and market share have almost tripled over the past two years.

RIJ: What trend does the emergence of the Envestnet Insurance Exchange, the DPL Financial RIA platform and the RetireOne RIA platform most represent?

Crager: The Envestnet Insurance Exchange represents all of the above but is the first platform to fully integrate annuities into the advisory ecosystem to respond to these trends.

  • Increasing centrality of (and dependency on) technology platforms like Envestnet for advisors, giving them a kind of Amazon or Google leverage in the market.
  • Boomer need for holistic retirement planning;
  • Gravitation of investor assets to the RIA channel;
  • Annuity-issuers’ imperative not to be left out of the RIA channel;
  • Growing interest among RIAs (either hybrid, dually-licensed or not insurance-licensed) to incorporate insurance products into their planning, perhaps as a path to asset consolidation.

RIJ: Thank you, Mr. Crager.

Talking to an analyst

The RIA market, and its investment advisor representatives (IARs), is not easy to understand. They may be “hybrid RIAs” who do or don’t maintain former broker-dealer affiliations and who may or may not be licensed to sell insurance. “Many successful RIAs are experienced ‘breakaways’ from larger traditional firms,” said Donnie Ethier, director of wealth management research and consulting at Cerulli Associates, in an interview this week with RIJ.

Donnie Ethier

“In the past, many RIAs likely used annuities before they transitioned to fee-based or fee-only business. If so, they likely understand annuities and still have clients that own them. While the independent RIA market must be address, hybrid RIAs may prove more successful. Many of them keep their broker-dealer affiliation because they see value in annuities,” he told RIJ.

“The lack of annuity sales among RIAs is definitely not due to a lack of insurers trying,” Ethier noted, but RIAs produced only about $2.7 billion of variable annuity sales in 2017 according to Cerulli’s modeling, he said. That’s slightly less than three percent of the $95.6 billion worth of VAs sold in 2017, according to LIMRA.

“One of the most important initiatives insurers must take is to better design and position annuities with how RIAs run their practices. The platforms [iX, DPL Financial and RetireOne] are important steps in accomplishing that. While I don’t expect RIA sales to immediately explode because of it, I do think its one of many important steps to grow their adoption rates.”

Talking to Brighthouse

The Shield Level Select Advisory Annuity is the no-commission version of Brighthouse’s Shield Level Select structured indexed annuity product. The Shield category of annuities is Brighthouse’s top-selling insurance product, with sales of $2.32 billion through the first nine months of 2018, up about 38% from $1.68 billion for the same period of 2017. Brighthouse (the spin-off of MetLife’s domestic retail businesses) launched the product category in 2017.

Brighthouse’s Assner said that the Shield product’s ability to protect retirees from market volatility would be “complimentary” to the income guarantees that other annuities on the platform will provide.

“We see it as a good fit for the advisors who choose Envestnet,” he told RIJ. Technologically, there’s a world of difference, he said, between merely having his product available on a bank or broker-dealer product shelf and having a presence on an advisor’s Envestnet desktop, where the advisor “can transact an annuity as easily as any other transaction on the platform.”

Brighthouse’s presence on the iX platform would lead to “audience expansion in the hybrid-advisor and true RIA” channels, he added. “We hope to reach both. Today they don’t use annuities.” Brighthouse expects to use the platform to expand sales to dual-licensed (licensed for insurance and security sales) advisors in the short term, but “over the long-term the bigger opportunity will be among the non-insurance-licensed advisor.”

© 2019 RIJ Publishing LLC.

Jack Bogle’s Spirit Lives On

John C. Bogle, the founder of The Vanguard Group, has passed from this world at age 89, an email informed me last night. “Saint Jack” has joined the angel investors on high, his earthly shares redeemed.

For a few years, a long time ago, I was one of the thousands of Vanguard employees who reported to someone who reported to someone who reported to someone who reported to him. But when the occasion once arose, he was the one who held a door open for me.

It’s a privilege to work for a great founder, and he started not just a company but a scrupulous cooperative business model that many admire, few understand, and none of his competitors would likely choose to imitate even if they did understand it. I once described Vanguard as “floating out there in space like the eye over the pyramid on the back of a dollar bill.”

A young Jack Bogle

Bogle built Vanguard but, oddly, didn’t own it. No one seems to. Bogle never demanded personal credit for Vanguard’s growth; instead, he attributed it to the three-way zeitgeist: the Boomer age wave, the 401(k) phenomenon and the information technology revolution. More important than financial success, he achieved a durable brand.

A brand is “a promise kept over and over and over,” a consultant once told me. Bogle kept several promises: to pass on economies of scale to customers, to avoid new ventures that would conflict with the customers’ interests, and to allow no cynicism or complacency toward customers to creep into Vanguard’s broad culture.

(He was legendarily frugal, but he had certain indulgences. The 1798 naval Battle of the Nile was a near-obsession, and the long outer walls of certain Vanguard campus buildings are curved, it was said, to recall, when seen from above, the hull of the HMS Vanguard, Admiral Horatio Nelson’s flagship in that battle.)

As for his policies toward employees, I will always appreciate Vanguard’s decision to contribute 10% of salary to every employee’s 401(k) account, above the company “match.” If every company in America followed that policy, there might be no “retirement savings crisis.”

Most people wear out only one heart in the course of a lifetime. Bogle wore out two: the original and the transplant. “Costs matter,” he was famous for saying. I think people, and a quaint desire to help make the world a more honest and prosperous place, mattered to him more. He’ll be missed.

© 2019 RIJ Publishing LLC. All rights reserved.

‘No Sign of Recession on the Horizon’

When the stock market experiences a down day, the market concludes that the economy could enter a recession by the end of this year and that the Fed will lower rates by year-end.

Forget it. Neither of those things is going to happen.

In mid-December the Fed suggested that it would boost the funds rate twice in 2019, from its current 2.25-2.5% target range to 2.9% by year-end. We still expect that to happen. However, in the near-term more and more Fed officials will advocate for no additional rate hikes until some of the current uncertainty comes to an end.

If that happens, which is what we expect, the Fed may well implement two additional rate hikes later this year.

The Fed continues to believe that potential GDP growth is 1.9%. GDP growth last year was 3.1% and the Fed expects 2.3% growth in 2019. Both growth rates exceed potential. Because the economy is at full employment, the Fed worries that inflation could begin to climb.

Potential growth measures how quickly the economy can grow over the longer-term when it is at full employment. It is interested in, say, a three-year growth rate for the labor force and productivity. We take comfort from the fact that growth for both measures has accelerated in the past year and, most likely, potential GDP growth is on the rise.

Growth in the labor force has picked up considerably. At the end of 2017 the three-year growth rate for the labor force was 0.9%. But the labor force increased 1.6% this year as rapid GDP growth lured some previously unemployed workers back into to work. The three-year growth rate in the labor force has climbed to 1.1%. If it climbs as rapidly this year as in 2018, the three-year growth rate will continue to climb.

Productivity growth has quickened. The three-year growth rate remains sluggish at 0.9% because of slow growth in earlier years. But growth this past year picked up to 1.5% and surpassed the 2.0% mark in the two most recent quarters. Like growth in the labor force, growth in productivity seems to be gathering momentum.

This suggests that potential GDP growth is on the rise. The Fed’s 1.9% estimate probably consists of 0.9% growth in the labor force and 1.0% growth in productivity. But, as described above, growth in the labor force has picked up to at least 1.1%. Productivity growth has climbed to 1.5%. Thus, potential growth is no longer 1.9%. It is probably close to the 2.5% mark.

If that is accurate, the economy can grow at a sustained 2.5% pace without generating inflation. If our forecast of GDP growth for 2018 of 2.8% is accurate, the Fed has little reason to further raise rates. That is particularly true if inflation expectations remain in check. In the past couple of months, inflation expectations have slipped from 2.1% to 1.8%.

Also, keep in mind that the yield curve has flattened considerably in the recent months. With the yield on the 10-year note currently at 2.6% and the funds rate at 2.4%, the yield curve is positive by just 0.2%. The Fed does not want the yield curve to invert. It knows that an inverted curve is a warning sign that a recession is likely within the next year.

If potential growth picks up to a pace roughly in line with projected GDP growth, inflation expectations are declining, and the yield curve is extremely flat, the Fed won’t raise the funds rate any time soon.

While recession chatter has become more widespread in the past month or two, there is no recession on the horizon for the foreseeable future.

© 2019 Numbernomics.

Shelter from the Storm in 2019

What would have to happen for this to be a tranquil year economically, financially, and politically? Answer: a short list of threats to stability would have to be averted.

First, the trade war between the United States and China would have to be placed on hold. In November and December, financial markets reacted positively to each hint of a negotiated settlement and negatively to each mention of renewed hostilities—and for good reason: tariffs that disrupt trade flows and supply chains do global growth no good. And, as we know, what happens in financial markets doesn’t stay in financial markets: outcomes there powerfully affect consumer confidence and business sentiment.

Second, the US economy will have to grow by at least 2%, the consensus forecast incorporated into investor expectations. If growth comes in significantly lower—whether because the sugar high from the December 2017 tax cuts wears off, the Federal Reserve chokes off the expansion, or for some other reason—financial markets will move sharply downward, with negative implications for confidence and stability.

Third, China will have to avoid a significant intensification of its financial problems. Successfully managing a corporate-debt load of 160% of GDP requires not just selectively restructuring bad loans, but also increasing the denominator of the debt- to-GDP ratio. With infrastructure investment weak and manufacturing production declining, China is increasingly unlikely to achieve the authorities’ 2019 target of at least 6% growth. In that case, slow growth and mounting debt problems will feed on one another, dragging down economic performance in China and much of the emerging-market world.

Fourth, voters in the European Parliament election in May will have to prevent the victory of a right-wing nationalist majority hostile to European integration. Europe needs to move forward in order to avoid falling back; the existence of the euro leaves it no choice. For now, moving forward means creating a common deposit insurance scheme for its banks, introducing at least a modest euro-area budget, and augmenting the resources of its rescue fund, the European Stability Mechanism. But if the common currency’s travails during the past decade have taught us one thing, it is that such measures cannot be force-fed to the European public by the elites.

Durable integration requires grassroots support. And that support must be evident at the polls.

All of these happy outcomes are of course far from assured. But if some of them materialize, they will increase the likelihood of others. For example, if US President Donald Trump ends his trade war, the growth outlook in the US and China will brighten. Robust growth there would create a more favorable external environment for Europe, brightening its own economic outlook and bolstering the electoral prospects of mainstream parties and politicians.

Conversely, a poor outcome on one front will dim the prospects on others. Disappointing growth in the US, for example, would cause Trump to seek a scapegoat. If not Fed Chair Jerome Powell and his colleagues, that someone will likely be Chinese President Xi Jinping. In that case, the trade war will be back on, and growth and financial stability in China would suffer accordingly. This combination of US and Chinese economic woes would then drag down growth in other parts of the world, fanning the populist backlash against the political establishment in Europe and elsewhere.

Similarly, if the negative shock is slower growth in China, the authorities in Beijing will almost certainly respond by depreciating the renminbi. This, too, would incite further trade conflict, with negative repercussions all around.

A final prerequisite for a tranquil year is a limited outcome for US Special Counsel Robert Mueller’s investigation into misdeeds by Russia’s government and the Trump family circle. This conclusion might seem odd. If the US president’s erratic personality, disruptive tweets, and counterproductive policies pose such a serious threat to stability, then surely a scathing indictment by Mueller and his team, leading the House of Representatives to draft articles of impeachment, is the most direct route to removing this danger.

But if the Mueller report implicates Trump’s children—Donald Trump, Jr., Eric Trump, and Ivanka Trump and her husband, Jared Kushner—or the president himself, Trump will lash out, as he does whenever he feels the need to defend himself. The likely targets include not just Mueller and the Democratic majority in the US House of Representatives, but also the Fed, China, Mexico, and the countries of Central America and Europe, as Trump lays down an economic smokescreen to cover his political misdeeds. This will roil financial markets and depress investor confidence. And there will be no obvious end to the disruption, given the low likelihood that the Republican-controlled Senate will vote to convict Trump.

Rather than pursuing impeachment, the Democrats should focus on how to beat Trump in the next presidential election. That means crafting an agenda and agreeing on a candidate. In the meantime, we can only cross our fingers and hope for the best. November 2020 is still a long way off.

© 2019 Project Syndicate.

Khalaf succeeds Kandarian as MetLife CEO

Michel A. Khalaf, president, US Business and EMEA (Europe, the Middle East and Africa), will succeed Steven A. Kandarian as MetLife’s president and CEO, effective May 1, 2019, MetLife announced this week. Khalaf also has been appointed to the MetLife board effective May 1.

Kandarian, who is retiring, will serve through April 30, 2019.

Khalaf has been MetLife’s president of EMEA since 2011 and in July 2017 added responsibility for the company’s US Business. In his expanded role, he has overseen:

  • The group benefits, retirement and income Solutions, and property & casualty businesses in the United States
  • Global employee benefits (GEB), MetLife’s only horizontal business providing employee benefits solutions to local and multinational employers in 39 markets
  • Individual and group insurance businesses sold through agents, brokers, banks and direct channels in more than 25 countries throughout Europe, the Middle East and Africa

Prior to taking on the leadership of EMEA, Khalaf was executive vice president and CEO of MetLife’s Middle East, Africa and South Asia (MEASA) region. He joined MetLife through its acquisition of American Life Insurance Company (Alico) from American International Group (AIG) in 2010.

In his 21 years at Alico, Khalaf held a number of leadership roles in various markets around the world including the Caribbean, France and Italy. In 1996, he was named the first general manager of Alico’s operation in Egypt. In 2001, he assumed the position of regional senior vice president in charge of Alico’s Life, Pension and Mutual Fund operation in Poland, Romania and the Baltics, as well as president and CEO of Amplico Life, Alico’s life insurance subsidiary in Poland. Later, he served as deputy president and chief operating officer of Philamlife, AIG’s operating company in the Philippines.

Khalaf is a graduate of Syracuse University with a Bachelor of Science degree in engineering and a Master of Business Administration in finance. He is a fellow of the Life Management Institute.

Kandarian became president and CEO on May 1, 2011, and chairman of the board of directors on January 1, 2012. He joined MetLife in April 2005 as executive vice president and chief investment officer (CIO). From 2007 to 2011, he also led MetLife’s enterprise-wide strategy, which identified key focus areas for the company.

As CIO, Kandarian oversaw the company’s more than $450 billion (as of Dec. 31, 2010) general account portfolio. He enhanced the company’s focus on effective risk management and diversified MetLife’s investment portfolio, including through the $5.4 billion sale of Peter Cooper Village/Stuyvesant Town in 2006. His efforts helped MetLife emerge from the 2008 financial crisis with the strength to execute the company’s $16.4 billion purchase of Alico in 2010.

Glenn Hubbard, currently MetLife’s independent lead director, will become MetLife’s non-executive chairman on Kandarian’s retirement. Hubbard joined the MetLife board in 2007 and became lead director in June 2017. Since 2004, Hubbard has been the Dean and Russell L. Carson Professor of Economics and Finance at Columbia University’s Graduate School of Business.

© 2019 RIJ Publishing LLC. All rights reserved.

Conning assesses life and annuity businesses

Conning, the pension and investment research and consulting firm, has released a proprietary new report, “2019: Life-Annuity Value Creation Strategies: Reorganization and New Players.” According to the executive summary of the report:

Since the financial crisis of 2008, life and annuity insurers have enjoyed almost a decade of positive statutory net income. Over that time, insurers have pursued both organic and inorganic growth strategies to increase net income. This study focuses on the inorganic strategies that insurers have used over the last decade. We focus on how insurers are creating value by strategically repositioning their companies.

Organizational Repositioning to Create Value

We identified 22 case studies of insurers pursuing value creation through organizational repositioning over the period from 2010 into 2018. These case studies represented approximately 25% to 30% of statutory assets and premium at the end of 2017.

Analyzing these case studies based on ownership structure and product features provided insight into potential reasons certain types of insurers may be more likely to pursue organization repositioning than other types. Further analysis explored the types of strategies used and the drivers behind its usage. Our analysis found that stock companies may be more likely to adopt organizational repositioning as a strategy than would fraternal or mutual insurers.

Capital Redeployment

Regulatory pressure, shareholder pressure, and annuity volatility pressure lead some insurers to increase value creation through organizational repositioning. Of these three, regulatory pressure applies to all insurers. Shareholder pressure and annuity volatility are limited to stock companies and annuity providers, respectively.

Our analysis of these pressures suggests that they are likely to remain in place. These continued pressures are likely to create more closed blocks of business. Insurers with those closed blocks will seek to divest them. For those companies, the emergence of new entrants, specialist insurers that want to assume closed blocks of long-tail liabilities, is a favorable development.

The First Wave of New Entrants

The first wave of New Entrants, which entered the market between 2004 and 2010, identified an opportunity for certain types of owners to build a business around managing closed blocks of annuities. For these companies, the attraction to the life-annuity industry was the ability to acquire assets for their asset management businesses at a lower cost.

In terms of value creation, early results suggest this model has been successful, even after accounting for capital infusions from the New Entrants. The business model and opportunity appear to hold the potential for future value creation.

For the broader life insurance industry, the emergence of these New Entrants provided the capacity to absorb closed blocks of annuities. Looking ahead, these companies may provide a similar function for other blocks of business. That further development can be seen in the continued emergence of the second wave of New Entrants and the evolution of their business model.

The Second Wave of New Entrants Emerge

The emergence of a second wave of New Entrants is a strong indication of the attraction of closed blocks and runoff companies to investors. This attraction is driven by the continued flow of capital to asset managers and their need to generate competitive returns for their clients. That need has led asset managers to pursue alternative assets, of which life and annuity blocks are one example.

The second wave of New Entrants benefits from a business model proven by the first wave of New Entrants. Our analysis of the second wave of New Entrants shows there has been a clear evolution to that business model. This evolution appears to be positioned to assume more complex risks and liabilities.

Looking ahead, as more New Entrants form, competition for liabilities could increase and impact pricing if the supply of liabilities is limited. Our analysis indicates that as New Entrants continue to emerge, competition could lead them to expand beyond a focus on annuities. Looking for liabilities beyond annuities may be one solution to reducing the impact on pricing.

© 2019 Conning. Used by permission.

A retirement account for cryptocurrency buffs

BitcoinIRA.com has launched a turnkey, white-label solution that will enable “enterprise businesses” to invest their customers’ savings into a Bitcoin IRA and allow customers to trade inside their account.

It can be used around-the-clock by registered investment advisors (RIAs), wealth managers and other licensed money managers with customers who want to invest in cryptocurrencies, according to a news release this week. Advisors can also allow customers “to trade for themselves and monitor their activity through a back-end administrative portal.”

Bitcoin IRA does not hold any of the funds. Management fees are distributed as trades are completed.

Bitcoin IRA’s enterprise program uses multi-signature “cold storage” wallets from BitGo. It also has a BSA/AML compliance program, two-factor authentication and a $1 million Consumer Protection insurance policy, according to a prepared statement by Bitcoin IRA Chief Operating Officer Chris Kline.

Bitcoin IRA recently launched Self-Trader, which enables customers to buy, sell, and swap cryptocurrencies directly inside their retirement accounts, 24 hours a day, 7 days a week. The launch also included a full BitcoinIRA.com website redesign, a new application process, new real-time cryptocurrency price charts, a knowledge center, order history reporting and more.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Advances in ‘A.I.’ favor direct channel growth: Cerulli

The direct-to-investor channel, which maintains relationships with nearly 40% of U.S. retail investor households, now accounts for more than $7 trillion in assets under management (AUM), according to Cerulli Associates, the global research and consulting firm.

Even with modest return expectations, this segment could easily approach $10 trillion by the end of 2022, the firm predicts. “Growth will be driven by a combination of investor choice and investor returns over the next few years,” a Cerulli release said.

“As direct providers increasingly layer-in enhanced advice offerings with access to highly trained advice personnel, traditional advisory firms will need to redouble their efforts to maintain their market share in the face of the growing presence of the firms in this segment,” said Scott Smith, director at Cerulli, in a prepared statement.

“Encouraging investors to use online planning tools is a prime opportunity for providers to help investors better understand their relative progress toward goals, while also uncovering unmet product needs,” added Smith. “To boost user engagement, providers must consider making their planning suites as modular as possible, with frequent feedback to reward incremental progress.”

“The use of artificial intelligence technology to augment online support and chat features is a major opportunity for platform providers to increase customer satisfaction,” he said.

“By logging users’ previous actions and stated goals, these tools will be better able to anticipate what answers investors seek and present product solutions even before investors know they want them.

“With advances in online advertising, providers are better able to target prospective clients who could be persuaded into action by promotions such as cash additions for significant account transfers. By delivering these offers through targeted advertising, providers can add assets without undermining the profitability of assets gathered organically through other avenues,” Smith added.

These findings are from the January 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition, which explores the challenges and opportunities facing providers attempting to grow assets under management in the high-net-worth, Millennial, and mass markets.

Securian issues new MYGA contract

Securian Financial has launched SecureOption Choice, a new fixed deferred annuity designed to be competitive in the multi-year guaranteed annuity (MYGA) marketplace, according to a news release this week.

SecureOption Choice, issued by Minnesota Life Insurance Company, offers guaranteed interest throughout the term of the annuity with no exposure to market risk.

Key product features include:

  • Competitive rates
  • Liquidity features
  • 3-, 5-, 7- and 9-year guarantee periods
  • 10% free annual withdrawals after the first year

“Clients continue to seek retirement products offering guaranteed returns. SecureOption Choice gives financial professionals a competitive new option to meet this growing need,” said Chris Owens, Securian Financial’s national sales vice president for retail life insurance and annuities, in the release.

SecureOption Choice is available to all Securian Financial-approved distribution channels.

Small employers warm to retirement plans: LIMRA

Only 42% of businesses with fewer than 100 employees offer retirement benefits (either alone or with insurance benefits), even though research shows that Americans’ top financial concern is affording a comfortable retirement, LIMRA reported this week.

But a LIMRA survey shows that 40% of those small business employers regard retirement benefits as “more important now than three years ago,” with 57% saying it is “equally as important.”

The larger the small business, the more likely they were to say retirement benefits are more important today than three years ago. Only 37% of employers with less than 10 employees say retirement benefits are more important now than three years ago, compared with 64% in companies with 50-99 employees.

Separate LIMRA SRI research points out that access to a retirement plan is essential to saving. Nearly 4 in 10 of all workers said they began saving for retirement because their employer offered a retirement savings plan. While 36% of small businesses don’t currently offer retirement benefits to their employees, 4% plan to in the next two years, and 19% of them report they might.

Open multiple-employer plans (MEPs) — retirement plans that are sponsored by multiple employers—could increase coverage for small business employees. Federal proposals in 2018 are intended to broaden the number of small employers who can participate in MEPs (by allowing many unrelated employers to join a single plan).

Citigroup settles 401(k) fiduciary lawsuit for $6.9 million

A $6.9 settlement of a suit filed in 2007 against Citigroup by its 401(k) plan participants has been approved by a federal judge, NAPA Net reported this week.

According to the original suit, Citigroup’s plan fiduciaries put the company’s own interests ahead of participants’ interests “by choosing investment products and pension plan services offered and managed by Citigroup subsidiaries and affiliates, which generated substantial revenues for Citigroup at great cost to the 401(k) plan.”

The settlement included $2.3 million for the plaintiffs’ attorneys, $15,000 for each of two class representatives and $374,100 for case-related expenses.

The remaining $4.2 million can be distributed to the approximately 300,000 former workers and retirees who invested in certain funds in the 401(k) plan between Oct. 18, 2001, and Dec. 1, 2005, or an average of $140 each.

“Defendants, defendants’ beneficiaries, and defendants’ immediate families” were excluded from the settlement.

Citigroup admitted no wrongdoing in the settlement, which the parties reached last August. The bank denied “…all allegations of wrongdoing, fault, liability, or damage to the Plaintiffs and the Class, deny that they have engaged in any wrongdoing or violation of law or breach of duty, and believe they acted properly at all times.”

Citigroup maintained that “(a) the fees charged by the nine investment options at issue were reasonable and not unduly high; (b) the performance of the nine investment options at issue was reasonable and, in any event, irrelevant; and (c) the choice to include the nine funds among many other investment options, was reasonable.”

The judge declared that in the case of Leber et al. v. The Citigroup 401(k) Plan Investment Committee et al. (case number 1:07-cv-09329, in the U.S. District Court for the Southern District of New York) that “the Settlement resulted from arm’s-length negotiations; (b) the Settlement Agreement was executed only after Class Counsel had conducted appropriate investigation and discovery regarding the strengths and weaknesses of Plaintiffs’ claims and Defendants’ defenses to Plaintiffs’ claims; and (c) the Settlement is fair, reasonable, and adequate.”

© 2019 RIJ Publishing LLC. All rights reserved.

 

Two Client-Centric Income Strategies

Assume that your clients, a 65-year-old married couple with $1 million in savings, are too risk-averse to rely entirely on the traditional “4%” withdrawal method for retirement income, but too risk-hungry to commit half their money to a single premium immediate annuity (SPIA).

To give them maximum flexibility, you could recommend a variable deferred annuity or an indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB). That would keep all their options open. But, at 65, they’re already past the ideal age for buying that type of product and maximizing its 10-year deferral bonuses.

So let’s consider two other, less orthodox ways to use annuities. I’ll call them the “Safety Last” and Safety First” approaches. The Safety Last approach uses an annuity to guarantee income over the last stage of retirement. The Safety First approach, by contrast, guarantees income over the initial stage.

In this informal thought-experiment, I compare these two strategies. But not in the usual way. Instead of trying to assess them by the amount of annual income they might generate or the final wealth they might deliver, I’ll introduce the ida that they target different risks, and suggest that the “best” method may be the one that eliminates the clients’ biggest financial anxiety. It’s a primarily client-centric approach to income planning.

Safety Last?

The Safety Last approach insures the latter part of life through the purchase of a deferred income annuity (DIA) or its pre-tax cousin, a qualified lifetime annuity contract (QLAC). Suppose that your clients use a quarter of their savings ($250,000) to buy a joint-life DIA or QLAC with a cash refund that returns unpaid premium to their beneficiaries. (Adding a cash refund feature to a joint-life contract doesn’t appear to reduce monthly income as much as it would for a single-life contract.)

Based on data from immediateannuities.com, $250,000 would buy a $40,000 annual income stream beginning at age 80. The clients would invest the remaining $750,000 as you recommend and spend it down by about $30,000 (4%) a year. Assume that $30,000 plus Social Security will cover their essential annual expenses.

A newly-published report from the Employee Benefits Research Institute (EBRI) in recent years offers evidence that people who use between 5% and 25% of their 401(k) balances to buy a DIA or QLAC can raise their personal Retirement Readiness Ratings (a benchmark EBRI created) and reduce their risk of running short of money in retirement. EBRI set the start date of their hypothetical DIA at age 85 in that study.

The study showed that DIAs, as expected, favor the people who live the longest. Anyone who died or fell seriously ill before receiving benefits would lose their premium if the DIA has no cash refund feature, early-distribution-for-illness clause, or flexible start-date. The study also showed that people with very little savings or a ton of savings don’t have much to gain from buying a DIA or QLAC. The poorest people tend to need all their money for current expenses, while the wealthiest aren’t at great risk of running out of money.

But for the so-called mass-affluent, especially those in good health and those who might take comfort in knowing that they’ll have a safe income stream at a time when they might face mental or physical decline, then DIAs or QLACs could make a lot of sense.

Safety first?

Now let’s reverse that strategy and consider buying guaranteed income for the first decade of retirement rather than the latter stages. Instead of applying one-quarter of the couple’s savings to a DIA starting at age 80, they could apply that $250,000 to the purchase of a 10-year period certain annuity paying about $28,000 a year or a comparable 10-year bond ladder.

This was more or less the strategy presented by advisor Dana Anspach, founder of Sensible Money in Scottsdale, AZ, and the principals at Asset Dedication, J. Brent Burns and Stephen J. Huxley, during an Investment & Wealth Institute (IWI) conference for Retirement Management Analysts near Jacksonville, FL, in early December. They used a bond ladder; I use a period certain annuity as a proxy. It’s easy to price with an online calculator.

This strategy eliminates sequence risk. It assures clients that even if their investments go bust during the first few years of retirement they wouldn’t need to sell depressed assets in order to generate income. It appeals to investors who believe in “stocks for the long run,” and who like the idea of giving 75% of their assets ten years to grow undisturbed. At the IWI conference, Burns and Huxley strongly recommended putting part of that money in small-cap value funds, which, they argued, perform best over the long run.

Clients who choose this strategy don’t necessarily face a risk “cliff” when the bond ladder or the period certain annuity ends. Over the initial ten years of retirement, they can harvest gains from their at-risk assets and extend the bond ladder or purchase more years of annuity income.

Where life-contingent annuities can introduce new elements of uncertainty—Will we die early? Will the beneficiaries feel cheated?—into the income planning process, a period certain annuity with a death benefit adds true certainty. (Period certain annuities do not provide mortality credits, however, unless the contract is a “temporary life annuity,” where the payments stop if the annuitants die before the end of the term.)

The larger point

We’ve now looked at two strategies that are driven by two of the risks that concern retirees the most: The risk of outliving their money and the risk of experiencing a market crash early in retirement. In that sense, they’re starkly different from each other. But they’re similar in one way. Both call for annuitizing only 25% of the client’s portfolio while leaving plenty of assets for extraordinary expenses, additional income or aggressive investment. (This example includes annuities with cash refund features so clients have no reason to worry about forfeiting assets if they die early.)

More to the point, these strategies represent a client-centric, risk-driven approach to retirement income planning. Advisors often look for the technique that generates, say, the most monthly income, the lowest taxes, the most final wealth, or the lowest failure rate. Or they may recommend strategies that suit their own habits or revenue models. But, if a client’s sense of security in retirement is the goal, the best solution (all else being equal) might be the one that addresses the risk that worries the client the most.

© 2018 RIJ Publishing LLC. All rights reserved.