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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.

The fastest growing broker-deal channel? Independents

Posted on November 29, 2018 by -

Independent broker-dealers (IBDs) have grown at a compound annual rate (CAGR) of 11% over the past five years, compared with 9% at retail bank B/Ds, 9% at regional B/Ds, and only 6% at the four wirehouse brokerages, according to a new report from Cerulli Associates.

IBDs have the second-largest advisor force at more than 59,000 and assets of $2.8 trillion, Cerulli said. When hybrid registered investment advisors (RIAs) and their assets are included in the total, those numbers reach 86,779 and more than $3.36 trillion.

Cerulli divides IBDs into four sub-segments:

  • True
  • Institutional
  • Niche
  • Insurance Legacy

“The Niche (14%) and Institutional (11%) IBD segments have buoyed channel growth over the past five years. Institutional IBDs are the largest,” a Cerulli release said. “There are only 24 in total. They control 49% of the channel’s advisor force and 59% of the assets. The segment continues to benefit from national scale, brand reputation, and increasing advisor-counts through recruiting efforts and acquisitions.

There are only 14 Niche IBDs, which are dramatically smaller and control just 11% of the channel’s advisors and 14% of assets. They focus on specific niches or products (e.g., retirement plans). Their advisors are the most productive in the channel.
The wirehouse picture is complex. “Naturally, being the largest channel in terms of wealth management assets, the four wirehouses have the most to lose in terms of market share and advisors,” Donnie Ethier, Director of Wealth Management and Consulting at Cerulli, told RIJ in an email. “Cerulli would not simply attribute their lagging the industry’s overall retail growth rate due to their size, however. There are many other factors at play.

“First, is advisor migration. Decisions by advisors, and entire teams, to relocate to other channels, including independent RIAs, has influenced these trends. Independent RIAs have expanded their advisor headcounts by about 5% over the past five and 10 years, while AUM has grown at 13% and 10% over the past five and 10 years, respectively. Hybrid RIAs have expanded at lesser, but comparable, rates.

“As noted, a portion the RIA growth is due to experienced wirehouse advisors relocating. In 2018, almost one-third of current wirehouse advisors that are considering/interested in relocating to other channels told Cerulli that they would prefer either the independent or hybrid RIA channels. Thirteen percent indicated IBDs.

“That said, there is another important element. Yes, the wirehouses’ growth rates have lagged other B/D channels’ over the past one and five years. However, this is for ‘retail’ assets. What can be overlooked is that the opposite is true in the high net worth (HNW) space. The wirehouses’ HNW growth rates have exceeded the industry average (HNW-specific) over the past 1, 5, and 10 years. Ultimately, their strategic decisions to focus on more affluent clients is paying off. This story is not necessarily observable when looking at overall asset trends.”

The growth of the IBD channel appeals to asset managers seeking broader distribution opportunities. According to Cerulli, “IBDs remain one of asset managers’ most consistent opportunities due to the large number of potential firm partnerships, advisors, and accelerating growth from the hybrid channel.”

To maintain growth, the channel will need to evaluate succession-planning models, improve advisor productivity, and protect against large teams migrating to the independent RIA model, the release said.

Cerulli’s latest report, U.S. Broker/Dealer Marketplace 2018: Escalating Margin Pressure, provides in-depth market sizing and competitive analysis of B/D channels, including wirehouses, national and regional B/Ds, IBDs, insurance B/Ds, and retail bank B/Ds. This report extensively covers recruiting and transition trends, including advisor movement sizing, advisor channel preferences, advisor retention, and transition metrics.

© 2018 RIJ Publishing LLC. All rights reserved.

BlackRock to acquire almost 5% of Envestnet

Posted on November 29, 2018 by -

Envestnet, the open-architecture, cloud-based turnkey asset management platform (TAMP), and BlackRock, the giant asset manager, are partnering to integrate BlacRock’s Digital Wealth technologies into Envestnet’s platform for registered investment advisors and other wealth managers.

The partnership calls for BlackRock, Inc., to acquire a 4.9% equity stake in Envestnet by purchasing about 2.36 million shares of Envestnet common stock for $52.13 per share. The aggregate purchase price is about $122.8 million.

Envestnet will also give BlackRock a warrant to purchase about 470,000 shares of Envestnet common stock at an exercise price of $65.16 per share, subject to customary anti-dilution adjustments. BlackRock can exercise the option for four years from the date of issue.

The Company expects the investment to close by the end of 2018, subject to clearance under the Hart-Scott Rodino Antitrust Improvements Act and other customary closing conditions.

Envestnet’s financial advisor for the deal is PJT Partners LP. Mayer Brown LLP is its legal counsel. BlackRock’s legal counsel is Skadden, Arps, Slate, Meagher & Flom LLP.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on November 29, 2018 by -

Milliman launches “Account Lock” for participants

Milliman, Inc., has introduced a new security feature on Millimanbenefits.com, which hosts account information for participants in Milliman client retirement plans. The Account Lock feature allows participants to “lock down” their accounts and prevent the initiation of any distributions or loans. It gives participants an added layer of defense against external security threats.

“It’s an intuitive and effective security innovation that we expect to see imitated by other plan administrators,” said Laura Van Domelen, a Milliman principal and Defined Contribution Client Relations Leader.

Principal appoints new president of Retirement and Income Solutions

Renee Schaaf, senior vice president and chief operating officer of Principal International, will become the new president of Retirement and Income Solutions (RIS) effective March 1, 2019. The current president of RIS and chairman of Principal Funds, Nora Everett, will retire at the end of March 2019 after four years in that position.

From 2000 to 2008, Schaaf held RIS leadership positions in marketing, strategy, and Principal’s midsized retirement plan businesses. Before moving to Principal International to lead strategic planning and business development, she served as vice president of national accounts in the health division.

Her successor in Principal International will be announced in early 2019.

Everett joined Principal in 1991 as an attorney. She held senior leadership roles within the law department before becoming president of Principal Funds in 2008, and then CEO of Principal Funds in 2010.

Wells Fargo offers retirement planning resources to participants

Wells Fargo Institutional Retirement and Trust has launched a Retirement Income Planning Center, an online resource for participants over age 50 in plans that Wells Fargo Institutional Retirement and Trust administers.

The Center provides do-it-yourself resources to help participants create retirement budgets and income plans. It also features videos of retiree experiences and tools to help visitors envision what retirement might look like.

Wells Fargo Institutional Retirement and Trust has also developed Retirement Income Conversations. Participants in a Wells Fargo Institutional Retirement and Trust-administered retirement plan can call a dedicated toll-free number and talk with a trained representative about retirement income. Onsite presenters also hold meetings in person at the work sites of those companies.

Two executive appointments at Northwestern Mutual

Northwestern Mutual have announced two new senior leadership appointments:

Christian Mitchell has been appointed to executive vice president and chief customer officer, assuming responsibility for Northwestern Mutual’s client and planning experience.

Mitchell will maintain his role as president of the Northwestern Mutual Wealth Management Company and will retain leadership of Investment Products and Services. Mitchell received his B.A. from Indiana University and his M.B.A from Yale.

John Roberts has been appointed to executive officer and vice president of distribution performance, working with the company’s financial advisors and leaders. Roberts is responsible for driving sales and developing new advisors. Roberts received his M.B.A. from Northwestern University’s Kellogg School of Management and B.S. in Finance from Indiana University.

To gain trust, banks should write more plainly

The 1851 novel Moby Dick by Herman Melville is easier to read than most of the content on even the best-performing banking websites, and this difficulty hurts trust in those financial firms. So says a newly published review of US banking communications by VisibleThread, a consulting firm.

“The financial services industry is one of the least trusted according to the Edelman Trust Barometer 2018. When asked what most damages trust, the number one response was unclear terms and conditions,” said Fergal McGovern, CEO of VisibleThread, in a release.

Key findings of the VisibleThread report include:

  • 90% of the banks surveyed use the passive voice excessively in their communications.
  • The average American reads at an 8th-grade level. The bottom 10 banking performers create communications at a nearly 11th-grade reading level.
  • 49 of 50 banks use sentences longer than the recommended level.

These factors make bank content complex and inaccessible. “Several banks could improve their rankings by making simple changes. Eliminate passive voice, reduce sentence length and choose less complex words,” according to VisibleThread.

© 2018 RIJ Publishing LLC. All rights reserved.

2018: A come-back year for indexed annuities

Posted on November 29, 2018 by -

Indexed annuities used to be a joke in the loftier precincts of the life insurance industry, but not any more. Once scorned by big insurers in favor of variable annuities (VAs) ignored by academics in favor of income annuities, and assaulted by state and federal regulators, they’ve emerged from a turbulent decade with the last laugh.

“I am not surprised to see yet another record-setting quarter for indexed annuities,” said a press release from Sheryl J. Moore, president and CEO two annuity data tracking firms and a tireless advocate for fixed indexed annuities (FIAs). “I want to prepare everyone, and just say that you can count on another go-round for fourth quarter, 2018; we are going to make it a three-peat!”

The Trump victory in 2016 helped. No longer in danger of violating the Obama administration’s tough fiduciary standard of conduct, advisors, reps and agents can safely go back to selling them on a buyer-beware basis. The sales figures reflect a return to the old regulatory normal.

In the third quarter of 2018, FIA sales were $18.0 billion, up 38% from third quarter 2017, according to the LIMRA Secure Retirement Institute (LIMRA SRI) Third Quarter 2018 Sales Survey (representing 95% of the market). Year-to-date, FIA sales were $50.1 billion, 22% higher than the first three quarters of 2017.

Rising interest rates have not hurt. “Over the past year, the 10-year Treasury rate has increased nearly 60 basis points and ended the third quarter above the 3% mark,” said Todd Giesing, annuity research director, LIMRA SRI.

Manufacturers and distributors can both find something to like about FIAs. These bond-based products offer a more stable chassis (relative to variable annuities) on which life insurers can build the living benefit riders that offer Boomers a flexible source of guaranteed income.

“FIA products with guaranteed lifetime benefit riders showed the most growth [among annuities] in the third quarter,” said Giesing. “In a higher-interest rate environment, companies are able to increase their guaranteed lifetime withdrawal rates.” VAs are also more capital intensive than FIAs, and bull markets can hurt as well as help them. Ohio National’s recent decision to leave the annuity business after selling too much of a rich VA product is a recent example of that.

Insurance agents once sold virtually all FIAs; now fee-based advisors and even registered investment advisors (RIAs) can sell them. FIAs’ combination of attributes—a guarantee against downside loss, high commissions for agents and brokers, better lifetime income than deferred income annuities, and a bit of exposure to the equity markets—add up to a viable sales proposition. Unlike VAs, a securities license isn’t required to sell them.

VAs still outsold FIAs through the third quarter of 2018, by $75.4 billion to $50.1 billion. VAs will likely continue to benefit from their status as the best way for high net worth investors to accumulate and trade equities on a tax-deferred basis. If you combine FIAs with other fixed deferred annuities, fixed annuities outsold VAs in the first nine months of this year by $94.6 billion to $75.4 billion.

LIMRA SRI expects total fixed annuity sales to hit record levels in 2018, with fixed annuities expected to end this year at around $130 billion, the fourth consecutive year exceeding $100 billion. This has never occurred in the more than 40 years LIMRA SRI has tracked annuity sales, LIMRA said. LIMRA SRI forecasts total 2018 FIA sales to reach about $70 billion. Slower growth is expected in 2019 and 2020.

The manufacturers

With their growing respectability—although some broker-dealers still haven’t embraced them—FIAs have found more life insurers wanting to offer them. Allianz Life of North America still rules the FIA world (as it has since buying Bob MacDonald’s Life USA in 1999 for $540 million) with a 13% market share (15.4%, according to Moore’s LooktoWink.com, which uses a slightly different survey base). Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the seventeenth consecutive quarter, according to LooktoWink.com.

But many new players have piled in, shuffling the sales leaderboard. The top 10 sellers of FIAs now include three FIA veterans (Allianz Life, Great American, and American Equity Investment Life), three offsprings of equity-backed firms (Athene, Global Atlantic and Fidelity Guaranty & Life) and four big insurers that have embraced FIAs in recent years (AIG, Nationwide, Pacific Life, and Lincoln Financial).

Rising competition from new entrants has been tough on American Equity Investment Life. Over the past three years, its third-quarter year-to-date sales have dropped from $4.75 billion in 2015 to $3.11 billion in 2018.

“There has not been any change in our ratings or reorganization since that time but the competitive environment has changed quite a bit over the last three years.  The LIMRA reports for the 2015–2018 periods should show substantial increases in fixed index annuity sales for Athene, Nationwide and AIG Companies,” Giesing said.

Jackson National continues to sell the most VAs, with its Perspective II contract a perennial sales leader. But even Jackson is selling fewer VAs than it used to. Jackson National sold $12.8 billion worth of VAs in the first nine months of 2018, down about 30% from $17.8 billion for the same period three years ago.

VA sales were $75.4 billion in the first nine months of 2018, up 4% compared with the same period in 2017. Variable annuity sales increased 25% in the third quarter to $25.0 billion, compared with prior year results, but LIMRA SRI expects VA sales to increase less than 5% in 2018. That would, however, represent the first annual growth for VA sales in six years. VA sales are expected to slightly dip in 2019 in anticipation of equity market declines, according to LIMRA.

While fee-based VAs increased 43% over prior year to $800 million, this is down 6%, compared with second quarter results. “There continues to be operational hurdles in the fee-based VA market, which challenge adoption of these products by certain distribution channels. We expect companies will work to resolve these in the next few years,” Giesing said.

The VA product with the most sizzle is a hybrid of an indexed annuity and a variable annuity: the so-called registered index-linked annuity or RILA. “One of the factors driving VA sales growth is the increase in RILA sales, which were nearly $3 billion in the third quarter,” said Giesing.

“With more companies signaling their intention to enter the market, LIMRA SRI expects this market to top $10 billion by the end of 2018. Greater volatility in equity markets and better pricing due to rising interest rates are attracting consumers looking for a blend of growth and downside protection.”

Third quarter RILA sales grew 27% to $2.98 billion, representing 12% of the VA market. Year-to-date, RILA were $7.68 billion, 13% higher compared with prior year.

Total annuity sales were $58.8 billion, 25% above the third quarter 2017 results. For the first three quarters of 2018, total annuity sales were $170 billion, 11% higher than prior year. LIMRA SRI expects 2018 individual annuity sales to surpass $230 billion.

Fixed annuities

Fixed annuity sales drove most of this quarter’s growth. Fixed annuity sales have outperformed variable annuity (VA) sales in nine of the last 11 quarters. Total fixed annuity sales were $33.8 billion in the third quarter, a 39% increase compared with third quarter 2017 results. Year-to-date, total fixed annuity sales were $94.6 billion, up 18% from prior year.

Fixed-rate deferred (FRD) annuity sales jumped 51% in the third quarter to $11.2 billion. Year-to-date, FRD sales were $31.3 billion, 17% higher than prior year.

LIMRA SRI expects FRD sales growth to continue into the fourth quarter. Many FRD contracts are out of their surrender charge period, which could find more attractive rates in the rising interest rate environment. LIMRA SRI expects 2018 FRD sales to grow as much as 20% and as much as 25% in 2019.

Fixed immediate annuity sales were up 20% in the third quarter to $2.4 billion. Year-to-date, fixed immediate annuity sales were $7.0 billion, 13% higher than prior year.  Deferred income annuity (DIA) sales rose 6% in the quarter, to $550 million. Year-to-date, DIA sales were $1.64 billion, down 2% from the same period in 2017. LIMRA SRI expects income annuity growth of 5-10% in 2018 and as much as 5% in 2019.

© 2018 RIJ Publishing LLC. All rights reserved.

VA income deferral incentives are working: Ruark

Posted on November 29, 2018 by -

Ruark Consulting, LLC today released the results of its fall 2018 studies of variable annuity (VA) policyholder behavior. The studies, which examine the factors driving surrender behavior, income/withdrawals, and annuitization, were based on experience from 13.3 million policyholders.

Twenty-four variable annuity writers participated in the study, comprising $840 billion in account value as of June, 2018. The study spanned the period from January 2008 through June 2018.

“In this study, we see new evidence of policyholder behavior changing over the course of a contract’s lifetime in ways that were not previously evident,” said Timothy Paris, Ruark’s CEO. “These include contract duration beyond the end of the surrender charge period, sensitivity of income/withdrawal commencement to moneyness levels, effects of systematic withdrawals on persistency, and guaranteed minimum income benefit (GMIB) annuitization decisions; all important factors for VA writers in pricing and managing risks for these products.”

Study highlights include:

  • Surrender rates have not returned to 2008 levels, even as strong equity markets have boosted account values. This is believed to be due to newer sales with more lifetime income guarantees and strong persistency incentives, retrenched VA product offerings since the 2008 financial crisis, and reduced attractiveness of non-VA investment alternatives.
  • 2016 was an outlier in recent years, with surrender rates materially lower than in preceding and subsequent years. This is believed to be the result of uncertainty surrounding the DOL’s proposed Fiduciary Rule and other political factors.
  • Contracts with a lifetime income guarantee have much higher persistency than otherwise. Also, a contract’s prior partial withdrawal history influences its persistency: those who have taken withdrawals at or below the maximum income guarantee surrender at much lower rates.
  • Those that take systematic withdrawals on lifetime income guarantees exhibit a select-and-ultimate effect, with very low surrenders in the first systematic withdrawal year, increasing to more typical levels within a few years.
  • Surrenders exhibit a dynamic relationship to “moneyness” of lifetime income guarantees, whether measured on a nominal basis – account value vs. benefit base – or actuarial basis reflecting longevity and the time value of money. In-the-money contracts surrender at rates about one-third of out-of-the-money contracts. Similarly, we can now see that owners commence income at higher rates when lifetime income guarantees become more in-the-money.
  • We can now see that product design incentives for owners to defer income commencement, commonly for 10 years, have been effective: commencement rates are highest in year 1 and in years 11+, with low commencement rates in between.
  • Overall lifetime income guarantee withdrawal frequencies have continued to increase, and utilization has grown more efficient with more than half at or near the maximum income guarantee.
  • Annuitization rates for contracts with GMIB continue to decline, with lower rates evident for “hybrid” designs that allow partial dollar-for-dollar withdrawals before annuitization.

Detailed study results, including company-level analytics, benchmarking, and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark Consulting, LLC (www.ruark.co), based in Simsbury, CT, is an actuarial consulting firm specializing in principles-based insurance data analytics and risk management.

Ruark’s behavioral analytics engagements range from discrete consulting projects to full-service outsourcing relationships. As a reinsurance broker, Ruark has placed and administers dozens of bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value, and also offers reinsurance audit and administration services.

Ruark’s consultants often speak at industry events on the topics of longevity, policyholder behavior, product guarantees, and reinsurance. Ruark Consulting collaborates with the Goldenson Center for Actuarial Research at the University of Connecticut.

© 2018 RIJ Publishing LLC. All rights reserved.

Jackson to reinsure closed block of John Hancock annuities

Posted on November 22, 2018 by -

Jackson National Life has agreed to reinsure 100% of the Group Payout Annuity business of John Hancock Life and its affiliate, John Hancock Life Insurance Company of New York, Jackson announced in a recent release.

The portfolio of over 230,000 policies relates mainly to pension participants that are primarily in the payout phase, the majority of the policies having been issued between 1980 and 2012.

The transaction closed October 31 on the non-New York portion of the business, representing approximately 90% of the overall block of Group Payout Annuities. The closing on the New York portion is subject to New York regulatory approval and is expected to occur in early 2019.

In total, the transaction involves Jackson indemnity reinsuring approximately $5.5 billion of statutory reserves, representing an increase in Jackson’s general account liabilities of approximately 10%. John Hancock will continue to administer the business.

The acquisition is structured as 100% reinsurance of a closed block of group annuities issued by John Hancock Life Insurance Company (U.S.A.) and its New York affiliate. The transaction is expected to have minimal impact on Jackson’s U.S. statutory Risk Based Capital position.

© 2018 RIJ Publishing LLC. All rights reserved.

Majority of Americans expect to use robo-advice by 2025

Posted on November 22, 2018 by -

Charles Schwab has published a new report, “The Rise of Robo: Americans’ Perspectives and Predictions on the use of Digital Advice,” that examines people’s outlook on robo advice, its potential impact on how they invest, and its impact on the financial services industry overall.

According to the report, the expectation that robo advice will play a significant role in shaping the investing landscape spans generations from Millennials to baby boomers. At the same time, most investors also acknowledge the critical role human advisors will play into the future.

Key findings in the report include:

  • People see a significant opportunity for robo advice to change the way they invest.
  • 58% of Americans expect to use a robo advisor by 2025.
  • 45% of Americans say robo advice will be the technology that ultimately has the biggest impact on financial services.
  • Most people still want a robo advisor that lets them interact with a person.
  • 71% of people want a robo advisor that also has access to human advice.
  • Among Millennials nearly 80% want a robo advisor that provides access to a person.
  • While Millennials are the biggest power users today, baby boomers see significant appeal in robo advice.
  • Nearly half of boomers using a robo-advisor (46%) say robo advice is perfect for their life stage.
  • 45% of boomers overall expect to use a robo advisor by 2025.
  • The current snapshot of US robo advisor users cuts across a broad range of investor types.
  • 60% of current U.S. robo users are Millennials; nearly 25% are Gen X.
  • More than half of robo users are female.
  • Current robo advice users are twice as likely to say managing their investments is extremely easy (compared to non-users).

© 2018 RIJ Publishing LLC. All rights reserved.