Archives: Articles

IssueM Articles

Honorable Mention

Posted on December 20, 2018 by -

Fed raises benchmark rate by 25 basis points

The Federal Reserve raised its benchmark interest rate on Wednesday and signaled that it expects additional rate increases next year in a display of measured confidence in the economy that came despite financial market worries and political pressure to suspend rate increases, the New York Times reported.

Jerome H. Powell, the Fed’s chairman, emphasized the continued strength of economic growth at a news conference after the announcement. He acknowledged new strains in recent months, including weaker growth in Europe and China and a downturn in stock prices, and he said the Fed expects slightly slower domestic growth and fewer rate increases next year.

But he defended the Fed’s decision to increase rates. “We think this move was appropriate for what is a very healthy economy,” Mr. Powell said. Mr. Powell’s remarks were described by one analyst as a dose of “tough love” for financial markets.

Mr. Powell insisted on the wisdom of the Fed’s plans to raise borrowing costs while investors dumped their holdings. Stock prices fell when the Fed released its policy statement at 2 p.m., and dropped again as Mr. Powell spoke. The S&P 500 was down 1.5% on the day and is now down 6% on the year.

The decision to raise rates for the fifth consecutive quarter, by a unanimous vote of the Federal Open Market Committee, amounted to a rejection of the view that the Fed should continue to stimulate the economy in the hope of increasing employment and wage gains. The benchmark rate will now sit in a range from 2.25% to 2.5%, abutting the lower end of what Fed officials consider the neutral zone: the region in which rates would neither stimulate nor restrain the economy.

“Policy at this point does not need to be accommodative,” Mr. Powell said of that milestone.

A.M. Best affirms the ‘A’ ratings of AXA Equitable Life

A.M. Best has removed from under review with developing implications and has affirmed the Financial Strength Rating (FSR) of A and the Long-Term Issuer Credit Rating (Long-Term ICR) of “a+” of AXA Equitable Life Insurance Company.

In March 2018, the ratings of AXA Financial, Inc. and its life insurance subsidiaries were placed under review with developing implications following AXA S.A.’s announcement that the group had entered into an agreement to acquire 100% of XL Group Ltd (XL) for a cash consideration of $15.3 billion (EUR 12.4 billion).

In May 2018, AXA S.A. executed a partial IPO of AXA Equitable Holdings, Inc., a new U.S. holding company with and into which the former AXA Financial, Inc. was merged.

AXA S.A. completed this partial IPO of the U.S. operations on September 12, 2018 and made a secondary offering of AXA Equitable Holdings, Inc. common stock in November 2018, allowing A.M. Best to conclude its assessment of the impact of these events.

Regarding AXA Equitable Holdings’ variable annuity business, A.M. Best said:

While AXA Equitable intends to maintain its very strong risk-adjusted capital profile going forward, it remains exposed to equity market pressures on both sides of the balance sheet.

These pressures emanate from its investment in AB and through its variable insurance products with guaranteed benefits, as well as potential volatility in revenue from asset fees as a result of market value changes in its large separate account book of business and derivative activity.

A.M. Best notes that the exposure from VA guarantees is managed effectively through reinsurance and hedging programs. In recent years, AXA Equitable has developed and introduced new and innovative products with the objective of offering a more balanced and diversified product portfolio while reducing product design risk. More recently, the company is looking to expand its product offering with product solutions tailored to the employee benefits marketplace.

According to A.M. Best, the new ratings reflect AXA Equitable’s balance sheet strength, which A.M. Best categorizes as very strong, as well as its strong operating performance, favorable business profile and appropriate enterprise risk management (ERM).

AXA Equitable’s rating affirmations are attributable to its very strong and improved risk-adjusted capitalization, strong financial flexibility, sophisticated risk management practices and its position as a leading variable annuity (VA) and universal life writer and global asset manager.

A.M. Best notes that in advance of AXA Equitable Holdings, Inc.’s partial IPO earlier this year, AXA S.A. made a capital contribution of more than $2 billion to the U.S. operations, resulting in a material improvement in its stand-alone risk-adjusted capital position.

AXA Equitable also benefits from a diversified and productive distribution model, which includes a recently increased ownership stake in AllianceBernstein (AB), a large publicly traded global investment management firm.

Also, AXA Equitable post-IPO continues to maintain an appropriate ERM framework with a focus on hedging strategies to protect its statutory and economic capital.

In anticipation of being a stand-alone U.S. entity, the company has updated its economic capital model to be more U.S.-centric by shifting away from Solvency II framework to a U.S. economic and risk-based capital/contingent tail expectation-centric capital model.

Additionally, asset risk consists of a well-diversified portfolio of invested assets, which are considered to be well managed.

A.M. Best notes that a deviation of methodology applies to the determination of the ratings of the following four subsidiaries of AXA Equitable. These subsidiaries were afforded rating enhancement from AXA Equitable despite the fact that it is not currently the lead rating unit as defined by Best’s Credit Rating Methodology (BCRM).

AXA S.A. (the ultimate parent), which is currently the lead rating unit for the group, has publicly made its intention clear to divest its majority interest in the U.S. operations over the near term, at which point it is A.M. Best’s expectation that AXA Equitable will become the lead rating unit, enabling it to afford rating enhancement to these four subsidiaries as per BCRM:

  • The FSR of A (Excellent) and the Long-Term ICR of “a” have been affirmed and assigned a stable outlook for MONY Life Insurance Company of America (Phoenix, AZ), another subsidiary of AXA Equitable.
  • The FSR of B+ (Good) and the Long-Term ICR of “bbb-” have been affirmed and assigned a stable outlook for AXA Corporate Solutions Life Reinsurance Company (Delaware).
  • The FSR of A (Excellent) and the Long-Term ICR of “a” have been affirmed and a stable outlook assigned for U.S. Financial Life Insurance Company (Cincinnati, OH).
  • The ratings have been removed from under review with developing implications and the FSR has been downgraded to B++ (Good) from A- (Excellent) and the Long-Term ICR downgraded to “bbb” from “a-” and assigned a stable outlook for AXA Equitable Life and Annuity Company (Denver, CO).
DPL Financial’s insurance platform for RIAs to offer no-commission Security Benefit annuity

DPL Financial Partners, the insurance product sales platform for registered investment advisors (RIAs), has agreed to begin offering a four-year version of Security Benefit’s Advanced Choice fixed-rate annuity to RIAs nationwide.

Advanced Choice is Security Benefit’s multi-year guarantee rate annuity (“MYGA”) product and the four-year guarantee period version is being offered commission-free exclusively through DPL, a release by the two companies said.

Security Benefit’s Advanced Choice Annuity can be purchased as an IRA, Roth IRA, 403(b) rollover or non-qualified contract. The product is available now through DPL.

Contaminated baby powder could lead to ERISA suit against Johnson & Johnson

Zamansky LLC, a Manhattan-based law firm specializing in securities and investment fraud, is investigating Johnson & Johnson Inc. for potential violations of the federal Employee Retirement Income Security Act (“ERISA”) related to the recent lawsuit filed against Johnson & Johnson over possible asbestos contamination of its iconic baby powder.

The firm wants to find out if Johnson & Johnson failed in its ERISA-mandated fiduciary duties by continuing to offer J&J stock as an investment option to the participants in the J&J Retirement Savings plan while it knew of liability exposure related to the powder.

On December 14, 2018, Reuters reported that internal Johnson & Johnson documents produced in a lawsuit involving cancer-causing asbestos found in baby powder reflect that company senior officers and lawyers knew for many years about the contaminated talc.

The documents showed that raw talc and finished powders sometimes tested positive for asbestos, and company executives, line managers, scientists, doctors and lawyers fretted over the problem and how to address it while failing to disclose the problem to regulators or the public while discussing it internally. These revelations caused Johnson & Johnson stock to fall by 10% in mid-December.

BNY Mellon to buy back more shares

BNY Mellon has received approval from the Federal Reserve and its board of directors to immediately increase its repurchase program of common stock by up to an additional  $830 million through the second quarter of 2019. These repurchases augment the company’s repurchase of $2.4 billion of common stock previously announced on June 28, 2018.

As of September 30, 2018, BNY Mellon had $34.5 trillion in assets under custody and/or administration, and $1.8 trillion in assets under management. BNY Mellon can act as a single point of contact for clients looking to create, trade, hold, manage, service, distribute or restructure investments. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK).

Single retirees need retirement advice: LIMRA SRI

The clichéd images of white-haired couples combing beaches together or canoodling in his-and-hers Adirondack chairs don’t apply to the millions of single retirees, but those soloists need just as much help from advisors as couples do, according to LIMRA Secure Retirement Institute.

There are 7.6 million single pre-retiree and retiree households (aged 55 and over) with assets of $100,000 dollars or more, according to LIMRA SRI. In total, U.S. post-retirees have about $6 trillion in savings. Only 38% of single retiree households work with an advisor.

Single retirees require special attention in retirement planning, a LIMRA release said. As a group, they are measurably less confident than married retirees. Only about two-thirds (64%) are confident that they “can live the lifestyle they want” in retirement, compared with 71% of retirees in couples.

Four in ten single retirees believe their savings won’t last if they live to age 90, but only about one third of married or partnered retirees feel the same way, the release said. Just 57% of single retirees are living the retirement they pictured, compared with almost 70% of married retirees.

© 2018 RIJ Publishing LLC. All rights reserved.

Life/annuity industry upgraded to stable from negative by A.M. Best

Posted on December 13, 2018 by -

A.M. Best has revised its market segment outlook for the U.S. life/annuity (L/A) industry to stable from negative for 2019, citing increased profitability, improved regulatory and tax environments and a strengthening U.S. economy, along with overall reduced balance sheet risk due to a proactive approach taken by companies in recent years.

A series of Best’s Market Segment Reports includes a discussion of A.M. Best’s outlook revision and views on the entire L/A industry, as well as the individual life insurance and annuity segments. Overall, the stable outlook reflects the improved risk-adjusted capitalization and liquidity of L/A industry participants.

Although volatility ratcheted up in the second half of 2018, A.M. Best expects the equity markets and interest rate movements to be net positives for operating performance. Business profiles in general are stronger, as companies continue to focus on core business lines and make use of alternative risk transfer mechanisms to shed risk. Enterprise risk management programs also continue to evolve to further identify and manage current and evolving risks.

The market segment reports outline other factors that are driving the outlook revision, including the following:

Products such as indexed universal life, which offer higher potential crediting rates under favorable equity market conditions, and other protection-based products continue to sell well despite overall flat premium trends in the life insurance segment.

Individual annuity sales increased 11% through third-quarter 2018, following three years of declines. A.M. Best views the impact of the SEC’s proposed “best interest” legislation as likely to be limited given the industry’s progress in preparing for the changes previously proposed under the vacated U.S. Department of Labor’s fiduciary rule.

Lower effective tax rates going forward will improve U.S. L/A insurers’ earnings, albeit partly countered by a decline in deductibility for absolute tax reserves.

Modestly rising interest rates, coupled with a relatively benign credit environment for the coming year, should bolster portfolio returns, which should restore investment spreads to equilibrium as new money yields gradually approach existing portfolio returns.

Insurers continue to take on greater risk in their investment portfolios, through either higher credit risk or lower liquidity, but many have done so by employing a barbell strategy. A.M. Best believes this approach works in a modest economic downturn but could have a greater negative impact on surplus if a more recessionary environment unfolds.

The divide between technologically superior companies and much smaller, less tech-savvy companies is getting wider. However, insurers overall acknowledge their shortcomings with respect to innovation. A.M. Best believes companies that take a measured, methodical approach to identifying where innovation can best help them now and in the future will compete effectively.

© 2018 RIJ Publishing LLC. All rights reserved.

Survey shows how advisors generate income for clients

Posted on December 13, 2018 by -

Over 70% of financial advisors believe it will take a significant correction in the equity markets to wake all investors up to the portfolio benefits of fixed income investing, according to a new survey released today by Incapital LLC, an underwriter and distributor of fixed income securities.

The survey of 200 financial advisors found that investors generate income primarily from dividend-paying stocks and equity income mutual funds.

The average asset allocation among the clients served by the advisors surveyed was:

  • Equities: 46%
  • Fixed income: 27%
  • Cash: 14%
  • Alternatives: 9%
  • Other: 4%

Half of the surveyed advisors expect their clients to increase allocations to fixed income or cash over the next 12 months; 29% expect an increase in equities. Principal protection has become a top priority for their clients, according to 76% of the advisors surveyed.

“With increased volatility in the market, we believe investors will now be far more receptive to assessing some of the potential benefits that are typically associated with fixed income. This is especially true among investors who have taken equity risk for income, and those who now may be focused on principal protection and a fixed and predictable stream of income,” said Paul Mottola, managing director and head of capital markets at Incapital, in a release.

Advisors surveyed seek three top benefits from fixed income investing for clients:

  • A predictable rate of income: 53%
  • Portfolio diversification: 51%
  • Return of principal at maturity: 38%

Eighty percent of advisors surveyed said they were bullish on bond ladders as an aid to managing interest rate risk. The risk of rising rates was the advisors’ top-ranked concern with fixed income investing, followed by finding attractive yields and generating income without adding portfolio risk.

Almost two-thirds (64%) of advisors said that bond ETFs (exchange-traded funds) have changed the definition of fixed income investing away from predictable income and return of principal to fixed income exposure. But bond ETFs do not provide all of the benefits of individual bonds, Mottola said.

“Most bond ETFs provide many important benefits, such as portfolio diversification and market liquidity. However, their income is generally not fixed, and in many cases their interest rate sensitivity remains constant over time, unlike a bond, which declines over time as the maturity date grows closer. This is an important consideration, especially given the risk of rising interest rates,” he said.

Among the investments typically used by advisors to generate income for clients, dividend-paying stocks led the way at 51%. Individual bonds were used 38% of the time.

  • Dividend-paying stocks (51%)
  • Equity income mutual funds (43%)
  • Annuities (43%)
  • Bonds (38%)
  • Bond mutual funds (39%)
  • Bond ETFs (29%)

Asked what would get them to use more individual bonds in their clients’ portfolios, 38% of advisors surveyed said “a rate increase.” They also want:

  • A simplified process to access bonds (32%)
  • Access to better online tools for evaluating bonds (28%)
  • Better education on bond investing (24%)

Almost two-thirds of the advisors surveyed (63%) believe that the bull market in bonds is over, or will be within 12 months.

Q8 Research LLC conducted the online survey for Incapital. A total of 200 financial advisors across channels completed the survey between September 20 and October 1, 2018. Advisors from wire houses, regional dealers, independent dealers, banks and registered investment advisors were surveyed. All respondents had three or more years’ tenure as financial advisors and were involved in portfolio construction decision-making with clients.

© 2018 RIJ Publishing LLC. All rights reserved.

The Newest Retirement Income Fintech

Posted on December 13, 2018 by -

It’s not unusual for male founders of retirement-oriented fintech companies to say that their entrepreneurial inspiration came from watching their pension-less mothers or grandmothers struggle with the complexities of retirement income planning.

Rhian Horgan, a former managing director at J.P. Morgan in New York, told RIJ that she was inspired to start her retirement oriented fintech firm, Kindur, after watching her father struggle with his transition into what, in industry jargon, we sometimes call the decumulation stage.

“My father is 69. He was part of the Boomer generation who delayed their retirements because of the 2008 financial crisis,” said Horgan, who received $9 million in venture funding this week, and plans to open for business in January 2019. When she talked to her father about his finances, she discovered that his problem wasn’t a savings shortfall but a complexity surplus.

Her parents owned about eight different retirement and brokerage accounts, all custodied in different institutions, she said. Her dad kept track of them all in his head. Her mother, silo-ed in traditional domestic affairs, knew little about the couple’s finances.

Rhian Horgan

Horgan, who joined J.P. Morgan in 1999 from William & Mary College, eventually rising to head of alternative investment strategies in the asset management division, looked for applicable solutions but found no online tools that fit. “Most of the talk in the fintech world was about saving—about getting people to retirement,” she told RIJ. “My dad’s problem was happening later in the process.”

So she decided to start her own fintech company, calling it Kindur (with a short i). Over the past two years she assembled a 16-member team not of young coders but of people with experience building asset allocation models or trading exchange-traded funds at firms like Fidelity Investment, Capital One, and J.P. Morgan. Other team members came from Earnest, which refinances student loans, and Seamless, the food delivery app. Kindur’s offices are in Manhattan’s Flatiron district, not far from Betterment, the accumulation-oriented fintech that started about four years ago—an eternity in fintech time.

Kindur, by contrast, is designed for people who are about to retire or have recently retired. It will help them generate steady retirement paychecks from savings of $500,000 to $2 million. About 25% of Boomer households, excluding the wealthiest one percent, have accumulated savings in that range, Horgan said.

A press release this week called Kindur “a new kind of financial services company designed to help baby boomers navigate their complex financial lives. Through straightforward digital advice and its signature retirement paycheck, Kindur makes sense of savings, insurance, social security and healthcare costs so users can focus on enjoying a hard-earned retirement with confidence.”

Kindur is a registered investment advisor with insurance licensing, and the paychecks will come partly from annuity payouts and partly from flexible withdrawals from an investment portfolio. Horgan is withholding details about her life insurance partner and the type of annuity she’ll offer until January. But she described the contract as a fixed annuity—not fixed indexed or fixed income—with an income option that clients can turn on when they want to. It sounds like a guaranteed lifetime withdrawal benefit, but she wouldn’t confirm that.

Clients can get occasional help from a Kindur “coach” but they’ll deal mainly with a self-service, algorithm-driven advice engine. “This is not going to be a customized financial planning service,” Horgan said. “But a coach is there to help answer questions about Social Security, for instance.” Horgan’s research shows that her target market hangs out on Facebook, her research shows, so Kindur plans to use the (increasingly controversial) social media giant to reach it.

As for Kindur’s revenue model, “We don’t generate any revenue from sales of specific investments. Instead, we align our interests with our customers by charging fees on an assets-under-management basis,” Horgan told RIJ. The specific fee levels will be available at launch in 2019, she added. “You can expect to see an offering which allows our customers to save versus their current fund fees and enables them to use these additional savings to keep funding their retirement.”
On December 12, Kindur announced the close of a $9 million Series A round of financing, including investments from Anthemis, Point72 Ventures and Clocktower. Anthemis has made previous investments in Betterment and many highly specialized fintech startups in banking, insurance, payments, and wealth management. Point72 Ventures has investments in, among many other start-ups, the “micro-investing” app Acorns.

A Series A round is typically a company’s first significant round of venture capital financing. The name refers to the class of preferred stocks sold to those investors. It is usually the first series of stock after the common stock and stock options issued to founders, friends, family and angel investors.

© 2018 RIJ Publishing LLC. All rights reserved.

FIA sales will exceed VA sales by end of 2021: Cerulli

Posted on December 13, 2018 by -

Fixed-indexed annuities (FIAs) and structured annuities are expected to see improved sales growth over the next few years, according to new research from Cerulli Associates.

“This finding could create new growth for insurance carriers looking for new opportunities to innovate their product offerings. Today, only 22% of surveyed carriers offer structured products,” a Cerulli release said.

Cerulli projects that FIAs will grow to 40% of total annuity production by 2023, which would put them on track to exceed sales of traditional variable annuities (VAs) by year-end 2021. Insurers continue to develop and enrich FIAs as many believe they offer advantages in almost any market environment: if interest rates rise, insurers can raise crediting rates; if rates are low, clients can focus more on index strategies, knowing they have downside protection.

“Indexed and structured annuities will likely fuel overall annuity industry sales growth over the coming years, although a rebound to the record years of 2007 and 2008 is unlikely to come any time soon,” said Donnie Ethier, director at Cerulli, in the release.

“As already seen to an extent in 2018, rising interest rates will add to the value proposition of traditional fixed annuities and income annuities. Any market downturn would also help FIAs continue to outpace VA sales.”

Total annuity industry sales were down in 2017, as a result of downward pressure from the Department of Labor Conflict of Interest Rule. However, the delayed implementation and subsequent repeal of the rule fueled a sales recovery, specifically for FIAs and VAs. Now insurers need to watch potential state-specific decisions.

“Cerulli forecasts that annuity sales will become more balanced across the major product types over the next five years,” explains Ethier. “Indexed annuity sales are expected to grow steadily and outpace traditional VA sales by 2021.” Ethier said, “Although a few VA carriers have increased the attractiveness of their optional guarantees, Cerulli does not see the sales trend reversing unless a greater number of VAs follow.”

Cerulli’s latest report, “U.S. Annuity Markets 2018: Remaining Well Capitalized and Adaptive,” analyzes the U.S. annuities marketplace, including distribution, product development, and asset management opportunities.

FIA sales, VA assets hit record highs in 3Q2018: IRI

Fixed index annuity sales ($18 billion) and variable annuity assets ($2 trillion) hit record quarterly highs in the third quarter of 2018, according to the Insured Retirement Institute (IRI), Beacon Research and Morningstar, Inc.

“While sales dipped a bit in the third quarter, we believe annuity sales will continue to improve given the reduction in disruption and uncertainty following the demise of the DOL fiduciary rule last spring,” said IRI President and CEO Cathy Weatherford, in a release. “We expect fourth quarter sales to remain strong and continue into 2019.”

For the entire fixed annuity market, there were approximately $17.9 billion in qualified sales and $13.9 billion in non-qualified sales during the 2018 third quarter.

“We expect all fixed annuity product types to continue showing robust growth in 2019 in an investment environment that is likely to be marked by higher interest rates and increased market volatility,” said Beacon Research CEO Jeremy Alexander.

Variable annuity net assets rose in the third quarter as the bull market in equities continued to drive higher valuations in subaccount assets, according to Morningstar. Assets reached $2.0 trillion, up 1.9% from the second quarter and up 2.4% from the year-ago third quarter. Net asset flows in variable annuities were again in negative territory, at -$19.4 billion in the third quarter, but that was an 8.1% improvement over -$21.1 billion in the second quarter of 2018.

Within the variable annuity market, there were $14.9 billion in qualified sales and $8.1 billion in non-qualified sales during the third quarter of 2018. Qualified sales fell 3.7 % from second quarter sales of $15.5 billion, while sales of non-qualified variable annuities were down 5.5 % from second quarter non-qualified sales of $8.6 billion.

“Strong market performance pushed assets under management past [a record] $2 trillion,” said Michael Manetta, Senior Quantitative Analyst at Morningstar. “While we still see weakness in VA sales, levels are recovering from record lows reached last year, and sales should continue to improve in 2019 as rising interest rates have a positive effect on lifetime income benefit features and insurer risk capacity.”

Total annuity sales
  • $54.9 billion. Industry-wide annuity sales in the third quarter of 2018
  • 0% decrease from sales of $56.0 billion during the second quarter of 2018
  • 20% higher versus third quarter of 2017 sales of $45.8 billion
  • $159.3 billion. Year-to-date total annuity sales
  • Up 7.1% from 2017 third quarter year-to-date sales of $148.8 billion
Fixed annuity sales
  • $31.8 billion in 2018 third quarter fixed annuity sales; flat compared to second quarter
  • Up 40.9% from 2017 third quarter sales of $22.6 billion
Variable annuity sales
  • $23.0 billion in 2018 third quarter variable annuity total sales
  • Down 4.4% from 2017 second quarter sales of $24.1 billion
  • 1% higher than 2017 third quarter VA sales of $20.9 billion
Fixed indexed annuity sales
  • $18.0 billion in 2018 third quarter sales, a record
  • 1% increase versus 2018 second quarter sales of $17.6 billion
  • 7% higher versus 2017 third quarter sales of $13.0 billion
  • At $7.0 billion, book value annuities sales were virtually flat in 2018 third quarter
  • 2018 third quarter sales 56.4% higher versus 2017 third quarter sales of $4.4 billion
  • $4.1 billion in market value adjusted (MVA) annuities sales, down 4.3% from 2018 second quarter sales of $4.3 billion
  • Up 53.3% from third quarter 2017 sales of $2.7 billion
Income annuity sales
  • 8% decrease from 2018 second quarter income annuity sales of $2.9 billion
  • 3% higher than 2017 third quarter income annuity sales of $2.5 billion

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on December 13, 2018 by -

A.M. Best affirms Ohio National’s A+ rating, despite lawsuits

A.M. Best has left the financial strength rating of A+ (Superior) and the long-term issuer credit ratings of “aa-ˮ of The Ohio National Life Insurance Company and its wholly owned subsidiary, Ohio National Life Assurance Corporation unchanged following a series of recent developments, including litigation initiated by certain distributors related to the company’s recent exit from the annuity market, as well as three notable senior management changes.

The stable outlook of these Credit Ratings (ratings) is also unchanged. Both companies are domiciled in Cincinnati, OH.

In September, the company stopped accepting applications for the purchase of annuity products to focus its resources on its core life insurance and disability income businesses. Subsequently at the end of September, the company announced that it was terminating payments of trail commissions on certain of its variable annuity products.

During this time, three members of senior management left the company, including the recently elected president and chief operating officer.A.M. Best said it has met with the chairman and the current senior management team to discuss these recent events and evaluate any potential impact to the group’s current ratings.

Recent events are not expected to have a meaningful near-term impact on A.M. Best’s view of the credit profile of the Ohio National Life Group, the ratings firm said, adding that it will monitor the impact of those and any future developments and take any necessary actions.

$24 million settlement in BB&T Bank excessive fee case

On November 30, BB&T Bank, the defendant, and participants in its 401(k) plan, the plaintiffs, have reached a $24 million settlement after three years of litigation in the U.S. District Court for the Middle District of North Carolina. Plan participants had accused the bank of charging plan participants excessive fees.

Under the terms of the preliminary settlement, BB&T Corp. will create a $24 million to reimburse plaintiffs, along with non-monetary relief. BB&T admitted no wrongdoing or liability. Law firms Schlichter Bogard & Denton; Nichols Kaster; and Puryear & Lingle represented the plaintiffs.

In the case, Robert Sims, et al v. BB&T Corporation, et al., employees and retirees of BB&T sued for alleged breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA).

In the initial complaint, filed on September 4, 2015 in the Court of Judge Catherine C. Eagles, plaintiffs claimed that BB&T selected and retained in the plan high cost and poor performing investments, incurred unreasonable administrative expenses, engaged in prohibited transactions with both fiduciaries and parties in interest, and failed to monitor and remedy the breaches of other plan fiduciaries.

As a part of the settlement, BB&T agreed to, among other reforms, engage a consulting firm to conduct a request for proposal for investment consulting firms that are unaffiliated with BB&T and an independent consultant to provide consulting services to the plan. BB&T will also conduct a request for proposal for recordkeeping services.

During the two-year period following final approval of the settlement BB&T will rebate to plan participants any 12b-1 fees, sub-transfer agent fees, or other monetary compensation that any mutual fund company pays or extends to the plan’s recordkeeper based on the plan’s investments.

Schlichter Bogard & Denton, has filed over 30 such complaints and secured 14 settlements on behalf of employees since 2006. In 2009, the firm won the first full trial of a 401(k) excessive fee case against ABB. On May 18, 2015, the firm won a 9-0 decision at the U.S. Supreme Court in Tibble v. Edison, the only 401(k) excessive fee case to be argued in the high court.

AIG names new chief financial officer

American International Group has appointed Mark D. Lyons to the role of executive vice president and chief financial officer (CFO). He succeeds Sid Sankaran, who will remain at AIG in an advisory capacity through the year-end reporting process for fiscal year 2018.

Lyons will serve on the AIG Executive Leadership Team and will report directly to Brian Duperreault, President and Chief Executive Officer of AIG. Lyons will remain Chief Actuary, General Insurance, until a successor is named.

Lyons joined AIG in 2018 from Arch Capital Group, Ltd., where he served as executive vice president, CFO and treasurer since 2012. Prior to joining Arch, Mr. Lyons held various positions at Zurich U.S., Berkshire Hathaway and AIG.

Lyons holds a B.S. in mathematics from Elizabethtown College, and completed the Executive Program at the Kellogg School of Management of Northwestern University. He is a Member of the American Academy of Actuaries and is an Associate of the Casualty Actuarial Society.

E*Trade offers online investing tool

E*TRADE Financial Corporation has announced a new educational tool that allows self-directed investors to choose from three exchange-traded fund (ETF) or three mutual fund portfolios, based on the investor’s self-identified risk tolerance, time horizon, and preference for active or passive investing. Highlights include:

  • Three non-proprietary ETF or mutual fund bundles categorized as either conservative, moderate, or aggressive.
  • A selection of commission-free, low-expense-ratio ETFs or no-load, no-transaction-fee mutual funds in each portfolio.
  • Jargon-free descriptions that highlight recognizable company names to make investing quick and easy to understand.

Portfolios can be selected and purchased with a $2,500 minimum for ETF portfolios and a $1,000 minimum for mutual fund portfolios.

Cigna expands its financial wellness program

Cigna, the global health service giant, is expanding the My Secure Advantage (MSA) financial wellness program to group insurance customers effective January 1, 2019. The program includes “money coaching,” identity theft protection and resolution services, and resources for preparing wills and other legal documents, according to a release this week.

The MSA program will now be standard for most Cigna Group Insurance customers with life, accident, disability, accidental injury, critical illness and hospital care insurance policies. At no additional cost, group customers and household members can use these services:

  • Thirty days of money coaching from an experienced financial professional with the option to continue the relationship on a self-pay basis.
  • Online tools and educational webinars to assist with financial planning.
  • Resources and templates to create and execute state-specific wills, powers of attorney and a variety of other important legal documents.
  • A 30-minute complimentary legal consultation with a licensed practicing attorney, and discounted attorney fees if additional time is desired.
  • Discounts on tax planning and preparation services.
  • Identity theft services including consultation with a fraud resolution professional.

The MSA program is made available through Cigna’s relationship with CLC Inc., a provider of legal and financial programs with a national network of more than 20,000 attorneys, mediators and financial professionals. CLC, Inc. is solely responsible for their products and services.

The program is not insurance and does not provide reimbursement for financial losses. The program is not currently available under policies insured by Cigna Life Insurance Company of New York.

Reinsurance deal with Athene will fund Lincoln share repurchases

Lincoln Financial Group has agreed with a subsidiary of Athene Holding Ltd. to reinsure approximately $7.7 billion of Lincoln Financial’s in-force fixed and fixed indexed annuity products, according to a news release this week.

The transaction was dated December 7, 2018 and is effective as of October 1, 2018. The agreement is structured as a modified coinsurance treaty with counterparty protections around investment guidelines and overcollateralization established to meet Lincoln Financial’s risk management objectives.

Lincoln will use most of the capital released from the transaction, including a ceding commission paid by Athene, to buy back $500 million worth of shares through an accelerated share repurchase program. The transaction is expected to be accretive to Lincoln Financial’s earnings per share in 2019.

Lincoln Financial will retain account administration and recordkeeping of the annuity policies. The transaction will not affect Lincoln Financial’s relationships or commitments to distribution partners and policyholders.

Goldman Sachs & Co. LLC acted as financial advisor to Lincoln Financial.

Empower finds appetite for open multiple employer plans

Sixty-six percent of small business owners who do not offer a retirement plan today are likely to consider an open Multiple Employer Plan (MEP), according to a new survey from Empower Retirement.

Open MEPs are defined contribution plans created by a plan service provider and offered to more than one unrelated employer. Two separate proposals, one in the U.S. House and one in the Senate, would broaden the scope of open MEPs by allowing service providers to offer multiple employers to join a single plan.

Almost all of the business owners who expressed interest in open MEPs said the biggest advantage in offering their employees a retirement plan is “it’s the right thing to do.” Additionally, 59% of employers interested in open MEPs said other advantages to offering retirement plans would be employee retention and attracting talent.

However, among the top reasons why small businesses don’t offer a retirement plan to employees is because their company is too small, survey respondents said.

Empower’s survey also reveals that 50% of small businesses associate open MEPs as coming with help from financial professionals.

A new paper by the Empower Institute “Open MEPs: A promising way to narrow the coverage gap” lays out more details from the survey.

Under the legislative proposals, open MEPs would allow unaffiliated small employers without the ability to administer their own plans to enroll their employees into professionally managed workplace plans that offer the economies of scale found in the plans large companies offer.

The impact of plan access on projected income replacement at retirement is significant. Participants who are eligible for a defined contribution plan and actively contribute have a median income replacement percentage of 79% compared to 45% for those without access.

At small businesses in the U.S. with fewer than 100 employees, less than half of workers have access to a defined contribution retirement plan, such as a 401(k). But according to the Empower survey,1 employees are interested in workplace retirement savings plans. Among the small businesses where owners are interested in open MEPs, 39% said employees expressed interest in having a workplace retirement plan.

© 2018 RIJ Publishing LLC. All rights reserved.

Send Pensioners Back to Work?

Posted on December 13, 2018 by -

In most developed countries, a retirement of leisure is one of the great socioeconomic innovations of the past century. But it is quickly becoming a luxury that few countries can afford, particularly in Europe. The retirees enjoying a second youth may not want to hear it, but it is past time that governments made public pensions partly conditional on community work.

Overly generous pension benefits are destabilizing public finances, compromising the intergenerational social contract, and fueling support for far-right populist movements. Across Europe, potential debt obligations due to unfunded pensions range from 90-360% of GDP. In Italy, some retirees receive pensions that are 2-3 times higher than their working-age contributions would entail. And across the European Union, the median income of people over 63 is almost as high as the median income earned by active workers.

Moreover, as a result of early-retirement policies, around 30 million pensioners across the EU are under 65 years old, which is to say that about 25% of all European retirees are not old at all. Making matters worse, the official retirement age has not been adjusted to account for longer life spans. When German Chancellor Otto von Bismarck introduced the world’s first public pension system in 1870, the eligibility age was 70 and the average life expectancy was 45. Today, the average European retires at 65 and lives until he or she is at least 80.

The standard way to fix this problem is to raise the retirement age or cut pension benefits. But each of these measures comes at a cost. The longer that older workers remain in the labor force, the more exposed they are to technological unemployment. From an employer’s perspective, older workers simply do not have the skills to compete with fresh graduates or younger colleagues. Greece’s experience during the euro crisis showed that cutting benefits can force retirees to reduce their consumption, causing recessionary pressures.

Lastly, the purely technocratic approach is a recipe for pushing older voters into the arms of populists. After appealing to retirees in the election earlier this year, Italy’s populist governing coalition is now trying to dismantle a technocratic pension-reform package that former Prime Minister Mario Monti pushed through in 2011. If they succeed, they will have undermined the stability of the system, all but ensuring that pensioners collect fewer benefits in the future.

A policy of mandatory active retirement would avoid some of the pitfalls of the standard approach. Although most seniors are ill-suited for today’s fast-changing labor market, they still have the skills, wisdom, and experience to contribute to society. As such, governments should start treating them as a segment of the workforce, rather than as a burden on public spending and economic growth.

With able-bodied retirees “working” for a pension, consumption patterns among the elderly need not decline, and governments would have more fiscal space to support the most vulnerable. Better yet, society as a whole would benefit from older citizens’ more active day-to-day engagement.

Contributions from the elderly could take many forms. As a first step, governments should survey pensioners to determine their competencies and the kind of community work they would like to perform. The focus should be on filling roles in education, social services, and health care that would otherwise require hiring public sector employees. Whatever is paid out in pensions would be at least partly offset by reduced public-sector wage costs. Alternatively, pensioners could serve as labor market reservists whom the government could call upon when the need arises.

Needless to say, the active-retirement condition would apply only to those who are physically and mentally fit to contribute, and the commitment to work would decline with age. At the same time, governments could impose financial penalties on those who refuse to contribute—particularly those who do not even remotely qualify as “elderly.”

Pensioners would instinctively resist any such reform, arguing that they earned their benefits in full, and that they already provide unpaid services such as child care within the home. In 2012, when Lord Bichard, a former head of the British Benefits Agency, suggested that retirees could make a “useful contribution to civil society,” pensioners-rights campaigners reacted angrily.

But community work would have benefits for pensioners, too. Studies show that idle retirement leads to a sharp decline in one’s cognitive skills, whereas a policy of active retirement would encourage older people to pursue fulfilling new challenges.

At the end of the day, conditioning retirement benefits on work represents a fair compromise between the self-defeating technocratic approach and the unsustainable populist approach. Asking governments to cut pensions at a time of rising job insecurity is a political nonstarter, whereas continuously promising more benefits is financially suicidal.

Enlightened politicians should appeal to older voters’ sense of fairness. Younger generations are being asked to contribute to a system that will pay out ever-smaller returns over time. If younger workers are to remain committed to the current system, they will need to see a display of reciprocity from their elders.

Idle retirement is a remarkable socioeconomic experiment that has been rendered unsustainable by current economic and demographic trends. It is time to put it out to pasture and try something new.

© 2018 RIJ Publishing LLC. All rights reserved.

Steve Vernon’s Guide to Retirement Success

Posted on December 13, 2018 by -

Steve Vernon, the Boomer, actuary, research scholar at the Stanford Center on Longevity, and co-author with the esteemed Wade Pfau and Joe Tomlinson of a 2017 Society of Actuaries paper called “Optimizing Retirement Income,” has published a new book for consumers about retirement income planning.

Called Retirement Game-Changers (Rest-of-Life Communications, 2018), the book promises to show near-retirees how to “generate recession-proof retirement income” for life, “enhance your health and longevity,” “protect yourself against ruinous medical and long-term care costs,” and “lead a fulfilling and socially connected life.”

That’s a big promise—the kind that perhaps only a sun-soaked Californian like Vernon can confidently make—but one that a host of well-known reviewers, including Christine Benz of Morningstar, Boomer zeitgeist guru Ken Dychtwald, and a host of newspaper columnists, say that Vernon delivers.

We’ll focus here on Vernon’s advice about retirement income generation. Consistent with his previous writing, Vernon recommends the purchase of single-premium immediate annuities (SPIAs) for people who have a gap between other safe income sources they may have—such as Social Security and pensions—and their minimum monthly spending needs.

Vernon doesn’t dive into any specifics about how SPIAs work; he doesn’t mention mortality credits, for instance. (I like to explain the SPIA concept by saying that it can let retirees safely spend up to 50% more per month in retirement than they can with the 4% “safe withdrawal” rule, given the same nest egg.) But Vernon already wrote a book that goes into more detail on annuities. It’s called Money for Life: Turn Your IRA and 401(k) or IRA in a Lifetime Retirement Paycheck.

The core of Vernon’s philosophy is captured in what he calls the “Spend Safely in Retirement Strategy,” which is distilled from a research project at the Stanford Center on Longevity and the Society of Actuaries. Its component steps include:

  • Delaying Social Security benefits (until age 70, if possible)
  • Creating a bucket of stable, liquid investments when you’re within five years of retirement (to protect against sequence risk or finance the Social Security delay)
  • Using investments as a Retirement Income Generator (spending required minimum distributions from qualified accounts, for instance)
  • Developing a cash side-fund for emergencies.

Vernon devotes considerable attention to reverse mortgages, which can provide annuity-like income later in life or can be used to set up a line of credit for emergency cash during retirement or for assisted living or nursing home expenses. The reputation of the reverse mortgage industry has been tainted by the dominance of sales by late-night infomercial hucksters, but the fact that so much Boomer net worth resides in home equity makes it virtually inevitable that these products will see greater use in the future.

Besides advice about generating retirement income, Vernon’s book contains lots of useful information about health, health care and health insurance. Vernon seems to favor Medigap insurance over those tempting zero-monthly payment Medicare Advantage plans—a sentiment that I share.

This is not a book for financial advisors, per se. If anything, it urges readers interested in annuities to turn to direct providers like Income Solutions, Immediateannuities.com, Fidelity, Vanguard, and Schwab. But I could easily see a fee-only advisor (members of the National Association of Personal Financial Advisors) giving this book to new middle-class (or “mass affluent”) clients as a way to save time.

This book is written by an expert from a consumer’s perspective; it focuses on minimizing investment expenses and maximizing freedom from anxiety about money. Vernon is one of the many career financial specialists whose professional and personal interests in retirement planning merged as they approached retirement, and who feel inspired to share what they’ve learned with fellow retirees and near-retirees.

© 2018 RIJ Publishing LLC. All rights reserved.

Allianz Life to nurture tech startups

Posted on December 6, 2018 by -

Allianz Life Ventures, part of Allianz Life Insurance Company of North America, has announced a multi-year strategic partnership with SixThirty, a St. Louis-based venture fund that specializes in investing in and scaling up fintech and insurtech startups.

Allianz Life Ventures will “mentor SixThirty portfolio companies, build networking opportunities and help startups with strategic planning,” according to a news release this week. The startups will “leverage Allianz Life Venture’s expertise, financial resources and global network of partners.”

Brian Muench, vice president of investment management at Allianz Life, will join the organization’s investment committee, which evaluates the investment pipeline and selects startups that SixThirty invests in. To date, SixThirty has invested in 44 startups.

Started in 2013, SixThirty invests in eight to 12 early-stage startups each year from around the world. In addition to receiving funding, the selected companies also participate in the SixThirty go-to-market program that offers mentorship, collaboration and networking with some of the leading incumbents in the financial services industry.

© 2018 RIJ Publishing LLC. All rights reserved.

Latinos fall behind in saving even as their numbers surge ahead

Posted on December 6, 2018 by -

Only 31% of all working age Latinos participate in employer-sponsored workplace retirement plans, resulting in a median retirement account balance equal to zero, according to the National Institute of Retirement Security and UnidosUS.

“Most Americans are far off-track when it comes to preparing for retirement, and this report offers an even grimmer outlook for Latinos. The retirement divide can begin to close if more Latinos have access to retirement plans and are eligible to participate,” said Diane Oakley, NIRS executive director.

“State-sponsored retirement plans that are taking hold across the nation also can play a big role in improving the retirement outlook for Latinos. Such plans target working Americans who lack access to employer-sponsored retirement plans, and less than half of Latino employees in the private sector have access to such plans,” Oakley added.

The research finds that:

  • Access and eligibility to an employer-sponsored retirement remains the largest hurdle to Latino retirement security.
  • The retirement plan participation rate for Latino workers (30.9%) is about 22 percentage points lower than participation rate of White workers (53%).
  • When a Latino has access and is eligible to participate in a plan, they show slightly higher take-up rates when compared to others races and ethnicities.

For working Latinos who are saving, their average savings in a retirement account is less than one-third of the average retirement savings of white workers. Overall, less than one percent of Latinos have retirement accounts equal to or greater than their annual income.

The report indicates that policy options that would greatly benefit Latinos are as follows:

Expand Plan Eligibility for Part-Time Workers. Given that top reason that Latinos did not have retirement savings was that they worked part-time. Allowing part-time workers the ability to participate in employer-sponsored retirement plans would greatly increase the number of Latinos that could save in a retirement plan.

Promote the Saver’s Credit. The Saver’s Credit is a non-refundable income tax credit for taxpayers with adjusted gross incomes of less than $31,500 for single filers and $63,000 for joint filers. Given that the median household income for Latinos was $46,882 in 2016, a large number of Latino households would qualify for the Federal Saver’s credit if they saved for retirement. By further promoting the credit, many more Latino households could be rewarded for saving for retirement.

Promote and Further Develop State Retirement Savings Plans. In 2014, an estimated 103 million Americans between 21 and 64 did not have access to an employer-sponsored retirement account. In response to this gap, a number of states have enacted state-sponsored retirement savings programs that automatically enroll individuals into a plan if they are not covered by an employer-sponsored plan. For Latinos, these plans are especially important. State retirement savings plan can assist with providing low-cost retirement products to working Latinos who are not covered by a workplace retirement plan, helping to alleviate the current retirement savings crisis that Latinos face.

Latinos lead population growth in United States, accounting for 17.8% of the total U.S. population and numbering over 57.5%. As the largest minority group in the U.S workforce, Latinos comprised 16.8% of the labor force in 2016.

The U.S. Census Bureau estimates that by 2060, the Latino population will number 119 million and will account for approximately 28.6% of the nation’s population. The U.S. Administration on Aging predicts the Latino population that is age 65 and older will number 21.5 million and will comprise 21.55% of the population by 2060.

This report updates and expands upon a 2013 report, Race and Retirement Insecurity in the United States, and is based on an analysis of the 2014 Survey of Income and Program Participation (SIPP) Social Security Administration (SSA) Supplement data from the U.S. Census Bureau. The report examines the disparities in retirement readiness between working Latinos aged 21 to 64 and other racial and ethnic groups.

© 2018 RIJ Publishing LLC. All rights reserved.

How to Save Social Security Systems

Posted on December 6, 2018 by -

Every society faces the difficult task of providing support for older people who are no longer working. In an earlier era, retirees lived with their adult children, providing childcare and helping around the house. But those days are largely gone. Retirees and their adult children alike prefer living independently.
In a rational economic world, individuals would save during their working years, accumulating enough to purchase an annuity that finances a comfortable standard of living when they retire. But that is not what most people do, either because of their shortsightedness or because of the incentives created by the government social security programs.

European governments since Otto von Bismarck and US governments since Franklin Roosevelt have therefore maintained pay-as-you-go (PAYG) retirement pension systems. More recently, Japan has adopted such a system.

But providing benefits to support a comfortable standard of living for retirees with just a modest rate of tax on the working population depends on there being a small number of pensioners relative to the number of taxpayers. That was true in these programs’ early years, but maintaining benefit levels became more difficult as more workers lived long enough to retire and longer after retirement, which increased the ratio of retirees to the taxpaying population.

Life expectancy [at birth] in the United States, for example, has increased from 63 years in 1940, when the US Social Security program began, to 78 years in 2017. In 1960, there were five workers per retiree; today, there are only three. Looking ahead, the Social Security Administration’s actuaries forecast that the number of workers per retiree will decline to two by 2030. That implies that the tax rate needed to achieve the current benefit structure would have to rise from 12% today to 18% in 2030. Other major countries face a similar problem.

If it is not politically possible to raise the tax rate to support future retirees with the current structure of benefits, there are only two options to avoid a collapse of the entire system. One option is to slow the future growth of benefits so that they can be financed without a substantial tax increase. The other is to shift from a pure PAYG system to a mixed system that supplements fixed benefits with returns from financial investments.

A US example shows how slowing the growth of benefits might work in a politically acceptable way. In 1983, the age at which one became eligible to receive full Social Security benefits was raised from 65 to 67. This effective benefit reduction was politically possible because the change began only after a substantial delay and has since been phased in over several decades. Moreover, individuals are still eligible to receive benefits as early as age 62 with an actuarial adjustment.

Since that change was enacted, the life expectancy of someone in their mid-sixties has increased by about three years, continuing a pattern of one-year-per-decade increases in longevity for someone of that age. Some economists, including me, now advocate raising the age for full benefits by another three years, to 70, and then indexing the future age for full benefits to keep the life expectancy of beneficiaries unchanged.

Consider the second option: combining the PAYG system with financial investments. Pension systems operated by private companies achieve benefits at a lower cost by investing in portfolios of stocks and bonds. A typical US private pension has 60% of its assets in equities and the remaining 40% in high quality bonds, providing a real (inflation-adjusted) rate of return of about 5.5% over long periods of time. In contrast, taxes collected for a PAYG system produce a real rate of return of about 2% without investing in financial assets, because real wages and the number of taxpayers rise.

It would be possible to replace the existing PAYG systems gradually with a pure investment-based system that produces the same expected level of benefits with a much lower tax rate. Unfortunately, the benefits produced by that contribution rate would entail significant risk that the benefits would be substantially below the expected level.

Research that I and others have conducted shows that a mixed system that combines the existing PAYG system with a small investment-based component can achieve a higher expected level of benefits with little risk of lower benefit levels.

The current structure of pension systems in most developed countries cannot be sustained without cutting benefit levels substantially or introducing much higher taxes. A shift to a mixed system that combines the stability of the PAYG benefits with the higher return of market-based investments would permit countries to avoid that choice altogether.

© 2018 Project-Syndicate.

The Links between Golf and RMDs

Posted on December 6, 2018 by -

What if the late, great Arnold Palmer had designed a golf course where the first nine holes were all played downhill and the back nine were all played uphill—only the back nine weren’t as steep as the front nine?

That arrangement could be inconvenient, it’s true. Golfers would finish their round at a lower elevation than where they started, and have to drive their carts uphill back to the clubhouse.

If he’d developed such a course, the cardigan sweater-wearing Palmer, while drinking his trademark iced tea-and-lemonade, might have been inspired by the US tax code and the required minimum distributions (RMDs) that 401(k) participants and IRA owners have to take from their tax-deferred accounts. The first distribution is due by April 15 of the year after the year they turn 70½.

Arnold Palmer in his prime

Ideally, they should benefit from so-called “tax deferral.” Most retired people (on life’s back nine) will pay taxes on distributions from 401(k)s and IRAs at a rate lower than the rate from which, as working people (on the front nine), they sheltered their contributions.

Despite enjoying a net gain from tax deferral, many wealthy retirees dislike this arrangement. For instance, someone with a $500,000 401(k) might need to withdraw about $15,000 a year or more from the account after age 70. At a 25% tax rate, that means a $3,750 tax bill on money that HNW retirees didn’t need for current expenses.

Sure, they can reinvest the remaining $11,250 in a taxable account (or give it to children or charity) but there’s still the hassle and the cost—like facing an uphill walk back to the clubhouse after your round of golf—and perhaps the fear that a mistake will result in a penalty.

Michael Kitces, the well-known advisor-speaker-blogger, seems to think that RMDs are not a big deal. Speaking at the Investment & Wealth Institute’s Retirement Management Forum this week in Florida, he compared RMDs to forced Roth IRA conversions after age 70½. RMDs produce zero change in a client’s wealth, he said. They just create a “balance sheet” adjustment, where money moves from a pre-tax to an after-tax account, current taxes get paid, and future tax liability goes down.

A ‘necessary evil’

The dreaded RMD was recently the subject of a survey of about 800 Americans ages 65 to 75 with $750,000 or more in savings ($500,000 if unmarried). “RMDs have long been thought of as a necessary evil,” said Paul Kelash, VP of Consumer Insights, Allianz Life, in a press release this week.

More than half (57%) of those surveyed said they want the disbursement and tax payment to occur “without getting involved.” Most significantly, the survey showed that about 80% of those ages 71 to 75 don’t need the money for current expenses and would rather leave the money to family or to charity.

Congress is aware of the pain associated with taking RMDs, and the House Family Savings Act of 2018, now awaiting reconciliation with a similar Senate bill, includes a tiny gesture of relief. Under the bill, retirees with less than $50,000 across all tax-deferred retirement plans (other than defined benefit plans) would be exempt from RMD rules.

But that’s a solution in search of a problem. Retirees with less than $50,000 presumably need their distributions for current expenses, and would withdraw money from their tax-deferred accounts even without a distribution requirement.

Why worry?

I understand the pain associated with RMDs. In part, it’s the nuisance of an unplanned, unexpected tax bill. A 75-year-old with a $500,000 401(k) would have to withdraw almost $22,000 and (at a 25% tax rate) would owe $5,500 in income taxes on the distribution. He or she can invest the remaining $16,500 in a taxable account.

But there’s another source of pain. Taxes notwithstanding, many people (anecdotally) don’t like the feeling that the government is invading their space. My late father-in-law used to complain about RMDs. He regarded the entire distribution as ill-gotten gains and, fortunately, gave it to his children.

Though I didn’t want to discourage that practice, I reminded him each year that he was a net winner from tax-deferral (because of his lower tax rate in retirement) and that in a world without RMDs, there’d be no tax deferral in the first place.

If people resent RMDs and don’t need the distribution for current expenses, it implies two things: First, that we should consider “Rothifying” the 401(k) system (eliminating tax deferral and the need for RMDs); Second, that we should cap or eliminate tax deferral for HNW participants, because so few of them seem to need it. I haven’t heard anyone say that they’d prefer that to RMDs.

My father-in-law, by the way, was no duffer. A hilly back-nine wouldn’t have troubled him at all.

© 2018 RIJ Publishing LLC. All rights reserved.

Greetings from the First ‘Retirement Management Forum’

Posted on December 6, 2018 by -

Dana Anspach, founder of a Phoenix-based advisor firm called Sensible Money, rides a Harley-Davidson Softail Slim, recommends bond ladders to take the worry out of retirement, and deals firmly with clients who question her floor-and-upside methodology.

“Some people say, ‘Why are you telling me that I will earn less than 5% when my other advisor says I can get 8%?’” she said. “They missed the point.”

Anspach was a featured speaker at the Investment & Wealth Institute’s Retirement Management Forum. Held this week on Amelia Island, Florida, the event was the first in what will presumably be an annual forum based on the curriculum of the Retirement Management Advisor designation. The IWI (formerly IMCA, the Investment Management and Consulting Association) recently bought that designation from the Retirement Income Industry Association (which is no longer).

Anspach

Besides Anspach, experts like Michael Kitces, Moshe Milevsky, Brett Burns and Stephen Huxley shared their retirement planning insights with some 200 IWI advisors. About 40 of them came to take the exam for the Retirement Management Advisor (RMA) designation, which IWI bought from the Retirement Income Industry Association (RIIA).

For many attendees, the event was likely their first exposure to the client-centric, open architecture post-retirement planning model that RIIA (now disbanded) spent the past decade refining. The model emphasizes “outcomes” over probabilities, promotes a holistic view of the entire “household balance sheet,” and encourages retirees to “build an income floor, then seek upside.” In other words, it gives priority (subject to the client’s needs and goals) to the creation of safe income over further accumulation.

The topic of annuities rarely came up. The roster of corporate sponsors reflected a tilt away from these income-producing products. Nationwide was the sole annuity issuer, while fund companies (Capital Group’s American Funds, Invesco, and Russell Investments). Anspach mentioned them as a possible solution for less-wealthy households. It will be interesting to see if insurance sponsors and presenters play a bigger role at future Retirement Management Forums.

The barbell approach

Anspach was one of the first advisors to obtain the RMA designation, and she has used its principles, along with her visibility as the author of the “Money Over 55” page at About.com, to build a $175 million practice. Rather than relying on traditional safe withdrawal rates from balanced portfolios, she likes to build income “runways” for clients.

Typically, she’ll recommend a bond ladder to provide reliable sleep-easy income for the first six to eight years of retirement. The client’s other assets go in equities for the long run. To err on the safe side, she assumes a 4.25% minimum required growth rate for the entire portfolio, including bond ladder and equities.

It’s essentially a bucketing strategy. Each year, the proceeds from the maturing bond ladder are poured into a cash bucket. When the equity portfolio does well, Anspach might recommend adding another year or two to the bond ladder. When the equity portfolio doesn’t do well, she might recommend less spending until the portfolio recovers.

Her charge for an initial retirement income plan is typically $6,900. That’s aggressive, but she applies the payment to future expenses if the prospect becomes a long-term client and switches to an assets-under-management billing basis. She doesn’t measure client risk “tolerance,” but instead their capacity to endure losses and still maintain their necessary spending levels.

She assesses her clients’ portfolios every year to make sure that their current assets can generate at least 110% of required annual income for the rest of their lives. The length of a client’s bond ladder and the division of assets between bonds and equities depends on whether he or she wants to maximize consumption or bequests.

Anspach shared a few observations about communicating with clients more effectively. “We develop spending plans for our clients,’ she said. “It sounds so much better than budget.”

Small-cap funds for the long run

A time-segmentation strategy like Anspach’s offers an important benefit: It allows retirees to take more risk with the money they won’t need to touch for a while. Brent Burns and Stephen Huxley of Asset Dedication LLC—a turnkey asset management platform that, among other things, builds bond ladders for Anspach’s clients—suggested that the best asset class for anyone with at least a 15-year time horizon is small-cap value.

In their slides, Burns and Huxley showed that various mutual fund asset classes mutual show no consistent pattern of returns from one year to the next. But a distinct pattern began to emerge as the time horizon grew longer. Over rolling periods of 15 years or more, small-cap value funds consistently produce the highest returns, followed by small-cap neutral funds and mid-cap value funds. (See the image below).

(Note: A $10,000 investment in Vanguard’s small-cap value fund 10 years ago would be worth more than $25,000 today. Fidelity’s small-cap value fund has averaged almost 15% a year since 2008 and 10.3% a year since inception in 2004. The Russell 2000 Index has returned an average of 12.50% over the past 10 years and 7.52% since inception. All figures are before taxes and fees.)

Stocks in IRAs?

Taxes can be the single largest annual expense for a high net worth retiree, so tax minimization is an essential skill for almost every advisor. Celebrity advisor and presenter Michael Kitces tackled two important tax topics at the IWI-RMA conference. The tax optimization of product placement—the ideal assignment of assets to taxable or tax-favored accounts—was the first.

The conventional wisdom is that stocks belong in taxable accounts. That’s true for buy-and-hold single stocks that can benefit from a step-up in basis at death, of course. It’s also true for S&P 500 index funds, MSCI-EAFE index funds, and master limited partnerships. There’s a limit to that rule of thumb, however.

Even equity investments, Kitces said, will do better in a tax deferred account under certain circumstances: if the growth rate is high, the holding period is long, the dividend rate is high, the turnover rate of the fund is high, or if there are in-the-money currency hedges or embedded losses. Don’t attempt tax/asset optimization without software, he noted.

The second topic involved the question of optimal withdrawal sequence. In this case, the conventional wisdom is to spend taxable money first, then traditional IRA or 401(k) money (so that the assets compound longer on a tax-deferred basis) and then, at the end, take the tax-free Roth IRA distributions.

Alternately, as Kitces recommends, you could take smaller withdrawals from both taxable and traditional IRA accounts. This strategy allows clients to spend only enough from tax-deferred accounts to fill up the lower tax brackets, and then, if necessary, spend from taxable accounts where withdrawals won’t be taxed at ordinary income rates.

Biological age v. chronological age

Healthy, wealthy people with access to great medical care tend to live about 10 years longer than average, the data shows. But getting clients to recognize that they should plan on living to age 95 isn’t easy—perhaps because it cost so much more to finance a 30-year retirement than a 20-year retirement.

Moshe Milevsky’s presentation focused on helping advisors make this reality more “salient” to clients. The finance professor, longevity expert and author from York University, talked about his study of the phenomenon of “biological age.” When clients learn their biological age, he said, it might shock them into planning to be around longer.

Milevsky, who is 50, recently sent his personal medical metrics to a consulting firm that calculates biological age. Tests indicated that he’s living in a 42-year-old’s body. He suggested that advisors might warn their healthy, 65-year-old high net worth clients: “You’ll probably live until you’re biologically 85. But that’s 30 years from now, because you’re biologically 55 today.”

© 2018 RIJ Publishing LLC. All rights reserved.

Annuities ‘Compensate’ Even Short-Lived People

Posted on November 29, 2018 by -

Heather and Simon, two 65-year-olds on the verge of retirement, have joined the bibulous Las Vegas gambler, Jorge, and the five 95-year-old bridge-playing tontine-minded grandmothers, among the useful fictions created by Moshe Milevsky, the Toronto-based annuity expert and author.

In a recent paper, Milevsky, a finance professor at York University’s Schulich School of Business, introduced Healthy Heather (in glowing health) and Sickly 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 more uncertain, statistically speaking. Ironically, they have more “longevity risk” than healthy people.

“Swimming with Sharks: Longevity, Volatility and the Value of Risk Pooling,” as the paper is entitled, 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.

Cross-subsidies

Milevsky

In Milevsky’s paper, Heather and Simon are each eligible for lifetime pension benefits of $25,000 a year from their employer. But she is in excellent health (a “shark,” in Milevsky’s metaphor) and expects to collect her pension until age 95 while he is in poor health (a “fish”) and will be lucky to reach age 75. So the pension plan, which is geared to average life expectancy, appears to be a much worse deal for him than for her.

How big is that shark-bite? At current rates, a life insurer would charge Heather (before fees and costs) $487,250 for a 30-year period certain annuity paying $25,000 a year, Milevsky calculates. The same insurer would charge Simon $212,750 for a 10-year period certain annuity paying the same annual amount. Since their pension plan (hypothetically) had to set aside about $350,000 for each of them, he suggests that Simon subsidized Heather to the tune of $137,250 ($350,000 – $212,750).

This seems to reinforce the conventional wisdom that people in relatively poor health should avoid life-contingent pensions: they’ll simply be handing money over to the longer-lived members of their annuity “cohort.” Not necessarily, Milevsky says. Not only do a certain number of disadvantaged people reach age 95; in fact, as noted above, their date of death is less predictable than that of healthy and wealthy people.

Happy as a CLM

To understand this argument, you need to be acquainted with the “Compensation Law of Mortality” (CLM). It states, “the relative differences in death rates between different populations of the same biological species decrease with age.” The law is also described as “late-life mortality convergence.”

“So, although there is an expected transfer of wealth, there are still insurance and risk management benefits to accepting such a deal,” Milevsky said. The chart below makes this easier to see.

“It’s more subtle than ‘Oh, fish might live a long time,’ Milevsky told RIJ. “It’s really about what pure academic economists call risk aversion. Basically, the uncertainty for the “fish” is much wider (see the blue curve above) so they value insurance more. They get more utility. They are willing to pay a higher ‘loading’ in the insurance sense. The reason their Longevity Risk is larger (again, blue curve) is because of the CLM. Nature made unhealthy people have higher volatility of longevity. Nature wants us all to pool.”

There’s an even more esoteric explanation for this phenomenon. A 1991 paper by Leonid A. Gavrilov and Natalia S. Gavrilova, discusses reliability theory, which includes a process called “redundancy depletion.” This describes the eventual loss of the back-up cells or systems that help people (and machines) function even after their primary systems or defenses break down.

“Redundancy depletion explains the observed ‘compensation law of mortality’ (mortality convergence at older ages) as well as the observed late-life mortality deceleration, leveling-off, and mortality plateaus,” the authors wrote.

Three takeaways
CLM is powerful enough, in Milevsky’s view, to make less-healthy people participate in mandatory pensions like Social Security. But it’s not strong enough to justify their purchase of retail life annuities, where “adverse selection”—the tendency of healthy people to buy life annuities—makes these products especially expensive for people with shorter longevity expectations.

Milevsky wrote in an email:
“I was trying to make three points in that paper and (academic) presentation I delivered at the HEC-Montreal conference. The first was about bio-economics, the second was about pension economics and the third about lifecycle economics:

Biology. The compensation law of mortality (CLM) implies that individuals with high mortality rates (fish) tend to have higher volatility of longevity risk compared to those with low mortality (sharks). So, the fish subjectively “value” life annuities more than the sharks, all else being equal. In some sense one can think of it as Mother Nature wanting the poor and rich to pool longevity risk together.

Pensions. Forcing people with high mortality rates to effectively pay the same price for annuities as individuals with low mortality, for example as in mandatory (unisex) DB pension plans, creates a large financial subsidy from high mortality to low mortality. But luckily, this is partially offset by CLM.

Lifecycle. Unless insurance companies start offering micro-tailored annuities (underwritten for each and every fish and its health), I would argue that a lot of retired fish who already have substantial pre-existing annuity income (e.g. Social Security), should not purchase any more annuities that are priced for sharks.”

[It should be noted that some life insurance companies in the US and UK do offer life annuities at a discount for people who have illnesses that are likely to shorten their lives. These contracts are called “medically underwritten” or “impaired” annuities.]

© 2018 RIJ Publishing LLC. All rights reserved.

Where the Income Puck is Going

Posted on November 29, 2018 by -

Consider the challenge that faces advisors who want to do good for humankind and do well for themselves by specializing in the intriguing new niche called retirement income planning.

If those advisors want to serve near-retirees with $500,000 to $1 million in savings, they need a semi-scalable planning tool and they need financial contracts that sensible clients will sign at the end of a two-hour meeting (ideally).

That’s not enough time to create a thorough plan, frankly. But efficiency is important for advisors serving clients with complex planning needs but not a ton of money. Efficiency offsets the cost of drilling a lot of dry holes as well as the relative slimness of this demographic’s values.

This problem will mainly affect independent advisors who make their own decisions but who are still learning to be ambidextrous: able to solve tough income cases quickly with combinations of mutual funds, annuities and perhaps life insurance or long-term care reverse mortgages.

To win at the income game, arguably, you’re going to need, along with the right licenses, a robust piece of retirement income planning software. You’re probably also going to need to sell, or bring into your repertoire of products, fixed indexed annuities (FIAs) with guaranteed lifetime withdrawal benefits.

Stating the obvious

Excuse me for stating the obvious: FIAs are designed to sell. Their designers have systematically stripped them of objectionable qualities. They offer (within bounds) liquidity, downside protection, upside potential, and a choice of indexing and crediting options. Especially important for income specialists: Some of their riders now produce more lifetime income after a 10-year waiting period than deferred income annuities.

FIAs have survived years of controversy regarding aggressive sales practices, two attempts to regulate them at the federal level (by the SEC in 2007 and by the Obama Department of Labor in 2016) and a lot of bad press. They are now an acceptable product for old-school domestic life insurers (like Nationwide, AIG and Lincoln Financial) to manufacture and for many fee-based Certified Financial Planners (CFPs) to sell without blushing. No-commission versions are available to registered investment advisors (RIAs).

So the idea of selling an FIA after one or two meetings, to clients whom the advisor may have known for only a short time, becomes feasible—much more feasible than the sale of an irrevocable income annuity or even a variable annuity with an income rider.

Excuse me for stating another truism: Retirement income planning is more complex than investment planning, and retirement income planning software is still evolving. But a number of online tools for income planners have now emerged. And we’re not talking about robo-advice platforms.

A decade or more ago, there were pioneers like Income for Life Model (IFLM) and Advisor Software (ASI). Then came adapted versions of investment tools like eMoney and MoneyGuidePro. Mass-market and boutique tools have included Income Discovery, Financial Preserve, Savings2Income, RetireUpPro, JourneyGuide, IncomeConductor, and one created by Nobel laureate Bill Sharpe.

The most advanced of these tools allow advisors to input new assumptions or preferences or “what-ifs” and generate different versions of plans on the fly, thereby eliminating the deadening turn-around time once required to make changes to a plan. The marketers of some of these new tools claim to make even a one-hour income plan possible.

Good better than perfect?

That may not be how you or I would want to be served. But many advisors are undoubtedly arriving at the discipline of retirement income planning from a sales-oriented past, and they won’t be looking for perfect solutions. They want a great razor (the planning tool) that will help them sell blades (annuities, in addition to mutual funds, long-term care insurance, and perhaps even reverse mortgages).

At best, the financial advice industry is still in a transitional period from the accumulation mindset to ambidextrous thinking that leads to highly customized income plans. I wish it were farther along, but it’s not. For now, many intermediaries will want and need processes and products that suit their old habits and comfort zones.

© 2018 RIJ Publishing LLC. All rights reserved.