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Britain test-drives “sidecar” accounts in state-run DC plans

Posted on November 15, 2018 by -

The “sidecar” savings account—a source of emergency cash that rides beside a worker’s retirement account—is being piloted in Britain by the National Employment Savings Trust (NEST), the UK’s nationwide, public-option, auto-enrolled defined contribution plan.

The first employer to test the savings account concept will be Timpsons, a chain of shops specializing in shoe repair. Timpsons will offer the service to its 5,600 workers starting next year, according to a report this week at IPE.com.

In the U.S., the Family Savings Act of 2018, recently passed by the House of Representatives, would clear the way for similar “rainy day” accounts within 401(k) plans in the US. Such funds are inspired by the fact emergency expenses force millions of Americans to dip into their 401(k) accounts.

Title III of the Family Savings Act “permits an individual to establish a universal savings account. An individual may contribute up to $2,500 each taxable year and withdraw the funds tax-free and without penalty at any time and for any use.”

In the UK, the sidecar accounts are designed to improve what officials call “financial resilience.” Employees can save into what NEST has dubbed “jars.” Plan contributions above the auto-enrollment minimum (currently 8% of salary) will overflow into the sidecar savings account until the sidecar balance reaches £1,000. Subsequent contributions go to the retirement fund.

The account would be labeled “for emergencies.” Studies have shown that this kind of framing can influence how judiciously people use the money. Once the sidecar balance falls back below the cap, contributions will automatically split again to pay into both accounts, until the savings account rises to its limit again.

Caroline Rookes, a trustee at NEST and chief executive of the UK’s Money Advice Service (MAS), said roughly a quarter of the UK population had no savings for sudden emergencies.

NEST, which manages £3.8bn (€4.4bn), developed the model with help from the Harvard Kennedy School. JP Morgan Chase’s charitable foundation and MAS are providing financial resources for the trial, while Salary Finance will provide the savings accounts.

© 2018 RIJ Publishing LLC. All rights reserved.

‘Auto-Portability’ Gets Closer to Reality

Posted on November 15, 2018 by -

“Auto-portability,” a technology that would expedite a participant’s assets from one 401(k) plan to another when he or she changes jobs, moved closer to reality this week.

The Department of Labor proposed a “prohibited transaction exemption,” or PTE, that would allow Charlotte, NC-based Retirement Clearinghouse (RCH) to offer such a service.

The CEO of RCH (formerly RolloverSystems) is Spencer Williams, a former MassMutual executive. The executive vice president who worked with him to obtain the ruling is Tom Johnson, Head of Policy & Development, also a life insurance industry veteran. Robert L. Johnson (no relation), founder of Black Entertainment Television, owns RCH.

RCH had sought the PTE for several years; the exemption would allow RCH to default participants into its program and charge a fee for its plan-to-plan transfer service, as long as RCH meets a list of DOL conduct requirements.

The public policy argument for auto-portability is that it can prevent “leakage” from 401(k) plans when people change jobs. Too often, workers withdraw small balances when they change jobs rather than roll their money into their next plan–a process that employers don’t necessarily make easy. The problem affects low-income people the most, since they change jobs more often, are more likely to have small account balances, and are more likely to need the cash for emergencies.

The DOL will accept public comments on the proposal for the next 45 days. Once the PTE is granted, RCH, which has piloted the program and proven the concept, will work on building a network of recordkeepers and plan sponsors to use the service.

“The advisory opinion is especially important to the plan sponsor. It makes clear the plan sponsor is not a fiduciary. Plan sponsors are averse to things that are not clear in the law today. By naming us as a fiduciary and granting us relief, the PTE also allows us to get paid for the roll in service,” Williams told RIJ this week.

“There are a significant number of conditions that we have to meet. Early on, we’ll have to prove that our fees are reasonable. There is also an extensive system of notices that we have to provide to participants to ensure that it’s a voluntary system. DOL is only granting the exemption for five years. The comment period for the Proposed Exemption closes on Dec 24th and we would expect the final Exemption to be issued 2-3 months later.”

Williams and RCH vice president Tom Johnson, with guidance from Groom Law Group, spent much of the past five years speaking to various groups about auto-portability and building bipartisan support it.

“We went to nearly all the groups that have a dog in this fight, on the left as well as the right,” Johnson said. “At one point we were asked, ‘Whose ox do you gore with this?’ And I said, ‘Other than Bob’s Big Screen TV Outlet, everybody wins.’” (The reference was to the perceived conflict that some 401(k) participants have between saving and buying a large smart television.)

“To deliver auto-portability we have to create a giant network where RCH sits at the hub and the recordkeepers are the spokes,” Johnson said, noting that as few as 10 large recordkeepers account for 80% of the 401(k) business in the U.S. “We have to go to the recordkeepers and ask them to implement our technology. It’s not complicated, but it still represents a technology spend.

“Along the way, you also have to create transmission standards. We act as an aggregator so that the recordkeepers don’t have to talk to each other, just to us. We’ll have transmission standards for that,” he added. RCH acts as the transmitter of assets and data from one plan to the next, not as an asset custodian. Independent custodians will warehouse the small accounts after they leave one 401(k) and before they arrive at the next.

© 2018 RIJ Publishing LLC. All rights reserved.

Ohio National Sued for Compensation Breach

Posted on November 15, 2018 by -

A Whitehouse, Texas, financial advisor has filed a federal class action suit against Ohio National Life in Ohio Southern District Court for allegedly refusing to pay future trail commissions on certain variable annuities with lifetime income riders that he and other broker-dealer reps have sold in recent years.

The suit, filed by advisor Lance Browning of Income Solutions Wealth Management, claims that Ohio National should continue paying him $89,000 a year in annual commissions that he earned by selling about 100 Ohio National annuity contracts that are still active.

On November 5, Commonwealth Equity Services, a Waltham, Mass., broker-dealer filed a similar suit against Ohio National in Massachusetts U.S. District Court. A third suit filed on November 8 in Ohio Southern U.S. District Court against Cincinnati-based Ohio National by Veritas Independent Partners, a Conway, Arkansas, broker-dealer.

In September, Ohio National’s assistant general counsel sent a letter telling advisors that it was canceling its selling agreements with them and their affiliates as of December 12, and it would no longer pay trail commissions to advisors who sold its products and opted for a combination of up-front and annual commission payments rather than a single large up-front commission.

Letters were also sent by the senior vice president of annuity operations at Ohio National, to variable annuity contract owners offering to buy back their contracts between November 12, 2018 and February 11, 2019. If the client would surrender the contract, Ohio National promised to increase the contract’s “Enhancement Base” by 65% or a 10% enhancement of the “Minimum Enhancement Amount.”

Annuity issuers have in the past offered to buy back variable annuity contracts that are particularly valuable for clients–that is, the account balances alone don’t cover the promised benefits–but by the same token represent significant liabilities for the insurer.

According to the Browning suit:

“Ohio National is unlawfully trying to change the rules after the game has already started. Ohio National has issued billions of dollars’ worth of variable annuity policies with guaranteed income benefit riders. The issuance of these policies involves four parties – Ohio National (the issuer), a broker-dealer (which has a “selling agreement” with Ohio National permitting it to sell the policies), a securities representative (who advises the customer about the policy), and a customer (who purchases the policy). Ohio National has induced the sale of its policies by promising annual, recurring commissions to the broker-dealers and, by extension, the securities representatives, and customers have purchased these policies believing that they will be able to rely on their trusted securities representatives to advise them on how to manage the investments in the policy and whether or when to annuitize or surrender the policy. Having induced the sales of these policies based on these promises, Ohio National has announced that it does not intend to hold up its end of the bargain – it is refusing to pay the promised recurring commissions, and thereby effectively cutting off customers from receiving financial advice about these policies from their trusted financial advisors. Ohio National is not allowed to do that.

“While Ohio National has the right to discontinue future sales of the annuities, it may not unilaterally terminate its obligation to pay trailing commissions on existing annuities.

“Perhaps even worse, Ohio National’s decision to stop paying trailing commissions for which it is already obligated will not even reduce the expenses for investors. The costs of the annuities will not go down one penny. Rather, instead of paying trailing commissions to the broker-dealers and their securities representatives, Ohio National has decided to simply pocket that money itself instead. And incredibly, Ohio National has not even implemented this unfair and improper policy evenly across the board as to all broker-dealers: it is continuing to pay trailing commissions to its own captive broker-dealer, Ohio National Equities, Inc. Furthermore, Ohio National is continuing to pay trailing commissions to broker-dealer Morgan Stanley Smith Barney LLC (“Morgan Stanley”) and its securities representatives.”

Lance Browning has been a securities representative with LPL Financial LLC since August 2012, according to his complaint. Before that, he was with Morgan Keegan and, from 1997 to 2005, with UBS/PaineWebber. All of those firms have selling agreements with Ohio National, which entitles Browning to trail commissions for selling its annuities, the complaint said.

Browning has sold over 100 Ohio National annuities that have currently not been surrendered, annuitized, or under a death claim, according to the suit. It said he has received approximately $89,000 in trailing commissions from Ohio National per year for many years. He claims about $89,000 in trailing commissions in 2019 alone, from those annuities already existing and in place.

© 2018 RIJ Publishing LLC. All rights reserved.

A Retirement Income Plan from United Income

Posted on November 15, 2018 by -

If you heard that Morningstar chairman Joe Mansueto and eBay founder Pierre Omidyar were investing in the same little robo-advisor, you’d probably want to learn more about it. You might even let their start-up manage your savings.

Meet United Income. Since its launch in 2017, only about 300 households have chosen it to manage assets of about $500 million, so it’s tiny. But it’s not obscure: its founding CEO, Matt Fellowes, is the fintech entrepreneur who created personal finance tool HelloWallet and sold it to Morningstar for $52 million. (KeyBank owns it now).

To demonstrate United Income’s capabilities for RIJ readers, one of its ten in-house advisors, Davey Quinn, used the firm’s software to create a retirement investment and spending plan for the M.T. Knestors, a real but anonymous couple with about $750,000 in savings. We present that plan below.

Matt Fellowes

United Income’s approach to income planning avoids annuities and focuses more on the low-cost passive investments and tax-efficient withdrawal strategies that appeal to Boomer and Gen-X households with $1 million or more. To calculate life expectancies, it also incorporates personal health information that other robo-advisors don’t typically ask for or build into their plans.

The plan that Quinn showed us—the first draft of a plan—is outwardly simple and straightforward, which in itself is a bit unorthodox. The plan doesn’t enforce a 4% withdrawal rule, or employ a time-segmentation (bucketing) strategy, or incorporate annuities. It doesn’t rely on mental accounting techniques like setting up emergency funds or capital accounts and sequestering them from income-producing assets. Instead, its algorithms use adaptive, automatic asset rebalancing behind the scenes to offset spikes in spending or market turbulence.

The plan’s main curb-appeal is a projection that the M.T. Knestors could become much richer in the future by following United Income’s suggested asset allocation than by sticking with their existing stocks-to-bonds ratio.

United Income charges 80 basis points per year for its full suite of services, applied to whatever money clients decide to custody with United Income for discretionary management. United Income is built for individual investors, not advisors. It also manages some institutional money.

The ‘M.T. Knestors’

You might remember the Knestors from previous RIJ studies of their case. Besides their savings accounts, they own a home worth about $300,000 and own three paid-off cars. Their mortgage will be paid-off by 2021. Their children have no remaining college debt. After he retires at age 70, Mr. Knestor expects to earn about $2,000 per month as a consultant. The Knestors expect a combined $4,000 per month from Social Security starting in 2021. They told Quinn that they’d like to annuitize Mrs. Knestor’s 403(b) account, which would pay about $1,400 per month (inflation-adjusted) for life.

The Knestors expect these four sources of income to cover their essential expenses ($4,000 per month), discretionary expenses ($1,000 per month), health care expenses ($1,000 per month) and miscellaneous expenses and taxes ($1,000 per month).

For any additional expenses, they’d have to liquidate invested assets. The Knestors expect a number of one-time, big-ticket expenses during their first ten years of retirement: a new roof in 2019, a wedding in 2020, another wedding in 2022, bathroom remodeling in 2025, and a new car in 2026.

United Income’s recommendations

The first draft of the United Income analysis showed that if the Knestors convert Mrs. Knestor’s 403(b) savings of $222,000 to an annuity, the remaining $533,000 would be allocated as follows.

What drives United Income’s asset allocation process?

United Income has an unusual process for assessing their clients’ tolerance investment risk. Each client’s overall risk profile is a composite of his or her tolerances for the risks of failing to meet specific expenses. In other words, United Income weighs the importance to the client of each expense or goal.

“For all spending needs, we ask our members on a scale of 0 to 10, how much risk would you accept for this spending need?” Quinn said. “Most members choose 2-4 for essentials and 6-7 for discretionary expenses. Lastly, members can rank their priority for each of these spending needs and add any additional spending needs as well. For additional spending needs, our members can specify the frequency, length and inflation rate for that goal. In addition, they assign a risk score for these spending needs.”

As those expenses are paid and eliminated, the client’s risk profile and asset allocation changes accordingly.

What withdrawal rate philosophy does United Income use?

United Income doesn’t use the famous-but-flawed 4% “safe withdrawal” rule. According to their plan, the Knestors would withdraw as much 10% or more per year from their savings, including more than $200,000 over three years. That’s because they planned for those big expenses (mentioned above) during the first ten years of retirement.

To maintain a sustainable withdrawal rate in every year of retirement, other advisors might have set up an all-cash “capital expense” fund that would be sequestered from the client’s more risky core income-generating portfolio. This tactic would insulate the core portfolio from “sequence risk”—the risk that high withdrawals and a market downturn might coincide in the early years of retirement, irreparably reducing account balances.

United Income does not prescribe this kind of bucket approach. “Instead of using mental accounting strategies, we factor the costs and risks of specific goals into the client’s recommended asset allocation. We based this target asset allocation on the level of risk for each spending goal,” Quinn told RIJ.

“For instance, if you want to invest conservatively in order to meet a specific expense in the next few years, your asset allocation will incorporate that expense into our calculation of the equity allocation. If the wedding risk score were changed to ‘1,’ then the target stock/bond mix would shift toward bonds. The target asset allocation is re-calculated every day, so each client’s asset allocation changes as each goal is met.”

Will the M.T. Knestors run out of money?

Not according to United Income. Quinn’s plan predicted that their portfolio had a 99% chance of lasting at least for as long as the Knestors live, and United Income predicted, on the basis of the Knestors’ self-reported health status, that they would both live into their 90s.

United Income’s projections showed that, starting in 2026 or so, after an anticipated period of high expenses and lackluster market returns, the Knestors’ net worth would begin to climb steadily. By 2050, if they adopted United Income’s 56% stock/43% bond allocation, the Knestors’ would be worth a projected $2.5 million if future market performance is “typical,” more than $3 million if performance is “very strong,” and $2.2 million if performance is “very weak.”

United Income uses Morningstar Capital Market Assumptions to make its market projections. Those assumptions call for 2.5% to 3.2% growth for a balanced portfolio over the next 10 years, and about twice that performance in subsequent years as the market reverts to its long-term average growth rates.

What about annuities?

Annuities generally aren’t a priority for United Income’s clients, Quinn said. The firm’s clients fall into two categories. About 28% have balances of over $1 million, and 72% have balances under $1 million. They want low cost investments, tax-efficient distribution strategies, and someone to handle their RMDs automatically. But United Income does offer an “annuity service” on its website.

“The annuity service is something that we do as human wealth managers for clients,” Quinn said. “We review any annuities they currently hold and evaluate the cost-benefit of keeping vs. surrendering the annuity. We may recommend an annuity if it makes sense for a client and will help them find an annuity provider to work with. We receive no commissions. We just look for competitive products for our clients. Also, as we have done in this sample plan, our software can analyze and model annuities.”

© 2018 RIJ Publishing LLC. All rights reserved.

 

Hybrid vigor: Many RIAs like support from broker-dealers

Posted on November 8, 2018 by -

The hybrid registered investment advisor (RIA) channel is no longer just “a midway point to owning an operating an independent RIA autonomously” but a distinct business model, according to Cerulli Associates’ latest report, U.S. RIA Marketplace 2018: Designing a Framework for Independence.

“The hybrid model has staying power,” said Marina Shtyrkov, research analyst at Cerulli, in a release. “Among advisors who switched to the hybrid model in the past one to five years, only 23% would choose to drop their broker/dealer (B/D) affiliation and move fully to the independent RIA channel if they were to switch firms.”

That may be good news for life insurers who hope to market commission-paying annuities to RIAs. “The appeal of commissionable product access can’t be underestimated, even in a fee-based environment,” said Shtyrkov. “The difference between being a hybrid RIA—with the infrastructure and product support of a B/D affiliation—and an independent RIA is greater than it may initially seem.”

Over the past decade, the hybrid RIA channel more than doubled its share of advisor headcount, to 8.8% from 4.1%. “This migration is primarily from wirehouses and independent broker/dealers (IBDs). Almost one-quarter of advisors who switched to the hybrid RIA channel one to five years ago are either wirehouse or independent B/D advisors,” she said.

The hybrid RIA channel attracts advisors who want autonomy with partial infrastructure, product access (commissionable and fee-based products), and a platform that can support growth. It can also absorb advisors who can’t or don’t want to manage a business and also work with clients, according to Cerulli.

Hybrid RIAs have grown faster than their independent RIA peers, the Cerulli report shows. Across all assets-under-management (AUM) segments from 2012 to 2017, hybrid RIAs saw a higher five-year compound annual growth rate (CAGR) than independent RIAs, thanks in part to their B/D support.

The Cerulli report provides additional insight into the dynamics of the RIA channel, including a comparison of long-term hybrids with transitional hybrids, an analysis of market sizing, advisor attributes, custodian and asset manager relationships, investment decisions and product use, and practice operations and growth strategies.

© 2018 RIJ Publishing LLC. All rights reserved.

Britain’s DB plans roiled by gender equalization

Posted on November 8, 2018 by -

UK corporate defined benefit (DB) pension plunged into deficit on aggregate in October following a High Court ruled that guaranteed minimum pension (GMP) payments could not be paid at different ages for men and women under EU equality laws.

The DB schemes of the UK’s 350 biggest listed companies showed a combined estimated deficit of £36bn (€41bn) on October 31, down from a £3bn aggregate surplus on September 30, according to Mercer Consulting.

“With the continuing backdrop of uncertainty likely to persist in the run up to the UK’s departure from the EU early next year, trustees should evaluate the potential impact on their sponsor’s financial security and put themselves in a position to capitalize on de-risking opportunities as they arise,” said LeRoy van Zyl, a DB strategist and partner at Mercer.

Pension funds were continuing to de-risk their portfolios and crystallize investment profits, Zyl said: “The need for taking selective action was demonstrated again during October as markets stepped back significantly from previous gains.”

Total liabilities rose by £21bn, Mercer said, attributing nearly three quarters of that to the UK High Court ruling. Combined assets fell by £8bn, due in part to falling equity markets. The FTSE All Share index fell 5.1% in October. The MSCI World index fell 5.6% in sterling terms.

While the High Court ruling related specifically to the Lloyds Banking Group pension plans, many other DB funds are expected to have to recalculate benefits and potentially make payments in arrears, according to a report in IPE.com.

Adrian Hartshorn, senior partner at Mercer, said, “Preliminary analysis… has suggested an increase to liabilities of between £15bn and £20bn, with the additional costs potentially flowing through the P&L account.

© 2018 RIJ Publishing LLC. All rights reserved.

SEC fines Citibank $38m for mishandling ADRs

Posted on November 8, 2018 by -

Citibank N.A. has agreed to pay $38.7 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission (SEC) said in a bulletin this week.

U.S. securities that represent foreign shares of a foreign company, known as ADRs, must be matched by an equal number of foreign shares in custody at a depositary bank. They are subject to a practice called “pre-release.”

Pre-release allows ADRs to be issued without the deposit of foreign shares if a broker or its customer owns the required number of foreign shares and if the brokers receiving them have an agreement with a depositary bank.

But Citibank improperly pre-released ADRs to brokers in thousands of transactions, the SEC found, when neither the broker nor its customers had enough foreign shares. This inflated the number of a foreign issuer’s tradable securities, which led to inappropriate short selling and dividend arbitrage.

The SEC action against Citibank was its second against a depositary bank and sixth against a bank or broker amid an ongoing investigation into abusive ADR pre-release practices.

“Banks and brokerage firms profited while ADR holders were unaware of how the market was being abused,” said Sanjay Wadhwa, senior associate director of the SEC New York regional office.

Without admitting or denying the charges, Citibank agreed to pay more than $38.7 million, including a return of more than $20.9 million in profits from the illegal practices, $4.2 million in interest, and a $13.5 million penalty, the SEC release said. The SEC order acknowledged Citibank’s remedial acts and cooperation.

Andrew Dean, Joseph P. Ceglio, William Martin, Elzbieta Wraga, Philip Fortino, Richard Hong, and Adam Grace of the SEC’s New York office conducted the investigation under Wadhwa’s supervision.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on November 8, 2018 by -

RetireOne platform to offer Great American Index Protector 7 FIA

RetireOne will offer the Great American Index Protector 7 fixed indexed annuity on its platform for RIAs and other fee-based advisors who are looking for no-commission annuities for their clients, the two companies announced this week.

Great American Life partnered with Wade Pfau, Ph.D., and InStream Solutions to create a tool that simulates the effects of allocating part of a retirement portfolio to the Index Protector 7.

In addition to its collaboration with InStream, Great American Life has forged technology integrations with Quovo, Tamarac, Orion and others. ARIA Solutions’ RetireOne platform has provided fee-based insurance products to over 900 RIAs and fee-based advisors since 2011.

OneAmerica crosses $2bn mark in retirement plan sales

OneAmerica expects $2.34 billion in retirement plan sales by the end of 2018, a nearly 20% increase from $1.93 billion at the end of 2017. It will be the first $2 billion-plus sales year for the Indianapolis-based financial services firm.

OneAmerica provides administrative and participant services for nearly 12,000 plans with over $63 billion in assets under administration. Its regional sales directors work with advisors and advisor firms representing plans with $3 million to $250 million in participant assets.

OneAmerica focuses on tax-exempt 403(b) plans, plans for professional services firms and plans for manufacturing firms.

“Our recent announcements of OnePension and Personal Retirement Accounts, through Russell Investments, are just two examples of how we are helping participants prepare for retirement through a next-gen default investment solution and guaranteed lifetime income option.”

OneAmerica is the marketing name for the companies of OneAmerica. Insurance products are issued and underwritten by American United Life Insurance Co. (AUL), a OneAmerica company. Administrative and recordkeeping services are provided by McCready and Keene, Inc. or OneAmerica Retirement Services LLC.

401(k) balances reach new high-water marks: Fidelity

Fidelity Investments today released its quarterly analysis of retirement savings trends, including account balances, contributions and savings behavior, across more than 30 million retirement accounts. Highlights from this quarter’s analysis include:

  • The average 401(k) balance reached an all-time high of $106,500, surpassing the previous record of $104,300 from Q4 2017. The average balance is seven percent higher than a year ago and 87% above the average balance of $56,900 in Q3 2008. The average IRA balance increased to $111,000, almost a 4% increase from last quarter and more than twice the average of $52,000 in Q3 2008. The average 403(b) account balance reached a record high of $85,500, nearly double the average balance of $43,300 in Q3 2008.
  • The number of people with $1 million or more in their 401(k) increased to 187,400 at the end of Q3, an increase of 41% from the 133,000 401(k) millionaires in Q3 2017 and nearly 10 times the 19,300 savers with a $1 million in their 401(k) in Q3 2008. The number of IRA millionaires increased to 170,400 in Q3 2018, up 25% from a year ago.
  • The overall average employee 401(k) contribution rate reached 8.7%, the highest level since Q4 2006. Contribution rates for women investors reached a record high with an 8.5% average rate in Q3. In addition, 32% of 401(k) women investors increased their contribution rate over the last year, compared with just 14% of 401(k) women investors who increased their contribution rate in the 12-month period ending in Q3 2008. IRA contributions among female Millennials increased 19% in the past year.
  • Half of all 401(k) accounts now hold 100% of savings in a target date fund. For the first time, more than half (50.4%) of 401(k) savers have all of their assets in a target date fund. Just over 30% of overall 401(k) assets are in target date funds, up from 9.8% of overall assets in Q3 2008. In addition, slightly more than half (51%) of all “new” 401(k) contributions go into a target date fund. For 403(b) savers, the percentage of individuals who have all their assets in a target date fund climbed to 62%, a record high.

An analysis of 401(k) savers who have been in their plan for either five, 10 or 15 years straight revealed the following:

  • Among workers who have been in their company’s 401(k) plan for five consecutive years, which is 32.2% of Fidelity’s entire 401(k) platform, the average balance reached $221,200 at the end of Q3, up from an average of $103,700 five years earlier. Among Millennials within this category, the average balance reached $82,000, up from $20,600 five years ago.
  • Among participants who have been in their 401(k) plan for 10 years straight, the average balance reached $305,400, nearly five times the average balance of $65,700 for this group 10 years ago.
  • The average 401(k) balance for workers who have been in their 401(k) plan continuously since Q3 2003 increased to $400,300 in Q3 2018, more than eight times the average balance of $47,800 for this same group in Q2 2003.

Empower offers new platform for IRA clients

Empower Retirement said this week that it will launch a digital consumer-focused wealth management platform for new and existing owners of Empower Individual Retirement Accounts as well as for prospective clients.

The new platform will bring investment advice, financial planning and insurance to “underserved mass affluent investors who may not currently work with a professional advisor as they make crucial personal financial decisions,” an Empower release said.

Empower will develop the platform in collaboration with Toronto-based Wealthsimple US, Ltd., and Dallas-based Apex Clearing Corp. Wealthsimple will build the user experience of the new retail platform. Apex will create and manage back office functions.

Empower, with approximately $570 billion in assets under administration and 8.7 million participants in 38,000 employer-sponsored retirement plans, is the nation’s second largest retirement plan provider.

Affordable Care Act co-ops lead insurance impairments: A.M. Best

Three health insurance co-ops (Consumer Operated and Oriented Plans) that were formed through the Affordable Care Act (ACA) became impaired in 2017, representing all U.S. life/health impairments in the last year and 18 of 20 impairments since 2015, according to a new A.M. Best special report.

The Best’s Special Report, titled, “2017 Life/Health Impairments Update,” states that from 2000 to 2017, 159 life/health insurers became impaired. The impairments consisted of 132 insolvent liquidations, 25 rehabilitations (of which 13 were closed during the period) and two conservation actions.

The significant challenge of operating as a qualified nonprofit health insurer under the ACA was the leading specific cause and was present in 19 of the impairments, A.M. Best said.

During the 2000-2017 period, 72% of the impairments concerned health (90) and accident and health (25) insurers, while 15% (24) related to small life insurers primarily focused on selling lower policy value industrial/burial or stipulated premium business in the South.

The remaining 13% of impairments involved five fraternal entities, eight annuity writers, and seven other life or combined life, annuity and health business. Six of the seven health insurer impairments in 2015 and nine of the 10 insurer impairments in 2016 related to the co-op plans.

Impairments are situations where companies are placed by court order into conservation, rehabilitation or insolvent liquidation. Supervisory actions undertaken by insurance department regulators without court order were not considered impairments for this study unless policyholder payments were delayed or limited.

Most impairments fell into the category of general business failure arising from a combination of poor strategic direction, weak operations, internal controls weaknesses or under-pricing and under-reserving the business.

© 2018 RIJ Publishing LLC. All rights reserved.

A Tax Break That Could Raise Retiree Income and Reduce the Deficit

Posted on November 8, 2018 by -

Taxes raise money for government operations, but they also sometimes serve to change behavior in society. Taxes on cigarettes are a well-known example because they tend to cause smokers to quit, especially when the taxes approach the cost of a pack. Society further benefits from a reduction in health-related costs.

I propose a tax change that would provide retirees with more spendable (after-tax) income and change financial behavior.

The tax decrease also would reduce the federal deficit. But before we discuss the benefits to the Treasury, let’s describe how retirees get their boost in income.

Boost income for retirees

Many retirees are necessarily conservative in their investments in retirement, since they don’t have new savings dollars to make up for any losses when markets decline, nor time to wait for a recovery. Those conservative investments, like Treasury bonds and CDs, earn less than stocks over the long run, and generate less cash flow than riskier investments.

What people really need in retirement is more money, not less.

Here is what I would suggest to help retirees generate more income by changing their behavior.

This tax cut would increase revenue. Really.

An example:

A retiree who is 70 years old might decide to put most (70% is the recommended rule of thumb) of his or her rollover IRA money in conservative fixed investments earning an average of 3% today. In contrast, if the retiree annuitizes a portion of that IRA savings, he would receive about 8%. The tax collector would receive at least 2.5 times more tax revenue from that shift.

The IRS could simply keep 100% of that additional tax. But a decrease in the tax on that income would promote annuitization and give retirees more money to pay for late-in-life expenses like health care. It could also stimulate revenue growth and provide several other economic and societal benefits.

The concept works for retirees. The next step is convincing legislators that this would also be good for the overall economy.

Four benefits for the economy

Benefit 1: The government would generate as much or more revenue by encouraging annuitization.

Benefit 2: Retirees would have more money to spend, stimulating the economy.

Benefit 3: Would-be retirees now with more income might leave their jobs earlier, creating openings for younger workers.

Benefit 4: Increasing spendable retirement income would reduce pressure on social programs—especially Medicaid, which supports long-term care, and Social Security.

Retirees with more income, for example, could afford in-home care and stay in their residences. They also might choose to put off Social Security payments until they are 70, which delays cash outflow from the system.

Tax cuts for good reasons

The tax authorities do this already in other areas. For example, by granting life insurance favorable treatment, death benefit proceeds are received income tax-free. The origin of this benefit, I believe, was to encourage individuals to buy life insurance as a way of protecting widows and orphans.

Long-term care benefits are also income tax-free, again to ensure against a critical risk. Longevity is another actuarial risk that society will pay for one way or another.

A simple way to provide a tax break for the purchase of longevity insurance is to exclude a percentage, perhaps one-third, of annuitized payments from tax. Studies we’ve done show that approach is relatively neutral in terms of the total tax bill for a retiree’s retirement income.

To make sure this tax break is not abused, the exclusion could be capped. And the tax break could apply to any form of annuitized income, including those offered through corporate or government pension plans, as well as income annuities offered by insurance companies.

This tax break and the higher spendable income, in turn, would encourage more workers to invest more of their retirement savings accounts.

What else does it take for win-win?

In addition to legislating this new approach for the IRS, investors and their advisors need to think differently.

Traditional advice to retirees focuses on asset allocation: divide savings into various buckets to balance risk and reward. I advocate that investors instead concentrate on income allocation.

First, decide how much spendable income your savings can produce. Then decide how to create that income. This approach is also safe, and at its core produces guaranteed income for life via the allocation to annuitized income.

Retirees often are reluctant to put part of their savings into annuitized income. They either imagine the stock market will produce more money, or they are afraid to bet on their own longevity.

A tax break on annuitized income might persuade more retirees to consider an alternative that would benefit them—and U.S. coffers.

© 2018 Golden Retirement. Used by permission.

‘I’m Not Retired. I’m Independent.’

Posted on November 8, 2018 by -

We need to retire the term “retirement.” We use this word several times a day, but we sense its lifelessness. It was never more than a by-product of pensions, and pensions were just carrot-flavored sticks invented by scientific managers to “retire” 65-year-olds in a timely and efficient manner.

In the heyday of pensions, of course, retirement was huge. Wintering in Florida or Arizona became a pastime that millions of ordinary older Americans took for granted. So many retirees enjoyed union pensions that, for decades, it seemed like all of them did.

But, today, when only police, firefighters, schoolteachers and a few other public sector workers still earn defined benefit pensions, “retirement,” for most people, is losing meaning. Like “golden years” and “senior citizen,” it’s beginning to sound archaic.

But what should replace it, lexicographically?

I suggest “Independence.” Starting in the near future, I propose, you won’t ask people with white hair, “Are you retired yet?” You’ll ask, “Independent yet?” They will smile and say either “Not yet” or “You bet!”

People will stop working when they can afford not to. On that day, they will be independent, as in “independently wealthy.” They won’t necessarily be wealthy, but they’ll probably be debt-free. Independence will never sound as old as “retirement.” It will imply nothing about your age.

Everyone will follow a different path and a different timetable to independence. Social Security’s full retirement age will still represent a milestone for many people, but independence can start earlier or later than that. People who love their work will keep working; retirement never meant much to them anyway.

“Pre-independent” people will still buy mutual funds through payroll deferral (though the term, “retirement plan,” will likely fade away). The still-employed may even start saving earlier and harder than ever, in hopes of reaching independence sooner. The Millennials I know seem to want independence today.

Unlike retirement, “independence” has no demeaning or dismissive connotations. Every American yearns for independence. It’s the ideal on which our country was built. When’s your Independence Day?

© 2018 RIJ Publishing LLC. All rights reserved.

 

New Bedfellows: Richard Neal and the 401(k) Industry

Posted on November 8, 2018 by -

Sixteen-term Congressman Richard Neal of Massachusetts is now a key figure for those who follow retirement-related legislation. As of Tuesday’s election, he’s the next chair of the House Ways & Means Committee, through which all tax-related legislation passes.

“Richard Neal has said that retirement will be his number one focus,” said Chris Gaston, government policy director at Davis & Harman, speaking at the SPARK Forum in Palm Beach this week. The SPARK Institute represents 401(k) recordkeepers.

In recent years, Neal introduced H.R. 3499, H.R. 4523, H.R. 4524, and H.R. 4444, all retirement-related. A proponent of requiring employers to help workers save for retirement at work, he backed the auto-enrolled workplace IRA at the heart of the MyRA program, which the Trump administration cancelled in 2017.

In 2017, Neal and then-Ways and Means chairman Kevin Brady (R-TX), helped preserve the carried interest tax loophole lobbied for by Wall Street firms. In 2007, he helped lead an unsuccessful movement to reform the Alternative Minimum Tax.

Ex-representatives must vacate their offices by Thanksgiving. Then the holiday season arrives. Republicans may, however, may use their majority to pass another tax cut before the 115th Congress ends on January 3.

Given the broad appeal of retirement reform, some are optimistic of the passage of a bipartisan bill sooner or later. “There is the rare occurrence of bipartisan support for retirement improvement,” said Beth Glotzbach, head of DCIO (defined contribution-investment only), Franklin Templeton Investments, at the conference.

As Ways & Means chairman, Neal isn’t just the gatekeeper of retirement legislation. He’s also the only legislator who can ask for President Trump’s tax returns. Neal said Wednesday that he will do so. But the President threatened after the election to retaliate against Democrats if they try to force disclosure of those documents.

Open MEPs and PEPs

Shortly before the election, the Republican-led House passed the Family Savings Act (H.R. 6757), a response to the Retirement Enhancement and Savings Act or RESA (S. 2526) that came out of the Senate Finance Committee last spring. Both have bipartisan support, but there may not be time for them to be reconciled and passed before the 116th Congress begins on January 4.

“I wouldn’t put the chances of a Family Savings/RESA Act resolution during the lame duck session at 50/50. I’d put it at 33%,” Mike Hadley, an attorney at the Washington firm of Davis & Harman, said at the SPARK Forum. “But if it doesn’t happen this year, it’s likely that Neal will propose it in the next Congress.”

Both bills would change current pension law to allow the formation of open multiple employer plans (open MEPs) or pooled employer plans (PEPs). Plan providers, such as recordkeepers, advisory firms, independent fiduciaries and payroll firms could sponsor 401(k) plans and invite dozens or hundreds of small or mid-sized unrelated employers to join them.

MEPs and PEPs could revolutionize the 401(k) industry. A massive land rush could occur, as dozens of provider-firms stake claims by establish PEPs. Consolidation is anticipated, as PEP-sponsors try to aggregate existing small and mid-sized plans. Expansion of 401(k) coverage is also expected, as employers without plans decide to join PEPs.

There will be winners and losers. “Let’s say that everybody still gets a slice in the new MEP world,” said David Levine of Groom Law Group during a panel discussion at the SPARK Forum. “But do some people get a bigger slice than they have now, and others get a smaller slice? I would challenge any assumption that everyone will win with MEPs. It could dramatically consolidate the market. Or it might be no big deal.”

One view is that a large registered investment advisor (RIA) like CAPTRUST or SageView that specializes in selling and advising retirement plans will be best-positioned to dominate a MEPs/PEPs world. “An advisory firm or two will figure out how to sell multiple-employer plans and will monetize this space,” said Rob Barnett, an administrative vice president at Wilmington Trust in Boston, which advises plan sponsors and custodies plan assets. “At first, MEPs will have to be ‘sold.’ But eventually they will be bought because the process will become pretty easy.”

Another view is that firms will cooperate on and compete for PEP business at the same time. “One of my favorite words is ‘frenemy,’” said Levine. “There are so many different scenarios. Historically, everyone stayed in his or her own lane. But in the future there’s going to be increasing overlap,” he said.

Levine described a potential “competitive free-for-all” where various types of plan providers cooperate but also compete. A recordkeeper might create a MEP and market it with its own sales forces or through plan advisors. Advisors might help recordkeepers sell MEPs, but also start their own MEPs and try to take away small employers from recordkeepers.

“This will fundamentally change the TPA [third-party administrator] marketplace,” said Kelly Michel, chief marketing officer at Envestnet Retirement Solutions, which can support RIA firms that decide to sponsor MEPs. She participated on a panel at the conference with Fred Barstein, founder of TRAU, The Retirement Advisor University.

“The vanilla kinds of small plans will be delivered through MEPs, and they won’t need more than one TPA each,” Michel said. “As plan sponsors, the recordkeepers will be most at risk [for fiduciary liability] and they may decide not to outsource the role of 3(16) fiduciary to a TPA at all. So this might dis-intermediate a lot of TPAs.” [A 3(16) fiduciary can administer 401(k) plans and act as their “named fiduciary” under pension law, with responsibility for ensuring that plans act in the best interests of their participants.)

Barstein sees MEPs as a way to modernize small plans. “One reason that MEPs will be so disruptive,” he said, “is that the MEP sponsor, whether it’s an advisory firm, a broker-dealer, an independent fiduciary, or a recordkeeper, will have an incentive to be innovative. Small plan sponsors have no incentive to be innovative. They don’t want to be out in front of the herd. They want to be in the middle of the herd.”

Given the uncertainty of the future, observers at the conference could let their imaginations run fairly wild. They spoke of Amazon or Google buying a plan recordkeeper and using their immense platforms to get into the retirement business. They spoke of “fly-by-night” self-described fiduciaries who might tempt small employers into too-good-to-be-true MEPs.

What will Neal do?

No one claims to know exactly where Neal wants to take the retirement system, or whether he will have the power to do so, given that the Senate and the White House can block any Democratic initiative. There is also some question if he will have time and energy to devote to defined contribution system reform.

“Historically he favored the auto-enrolled workplace IRA, but for last two years he has been behind a mandate that all employers offer a retirement plan,” Gaston said. “This has gotten support from a number of financial services firms, who are more inclined to support a federal mandate to preempt state mandates. He wants to modernize the retirement system.”

This year, much of Neal’s time and attention has gone into trying to save “closed multiple employer plans,” which are distinct from open MEPs. Closed MEPs are defined benefit plans for companies in the same industry or that employ members of the same union.

“He’s on the joint committee on the future of closed MEPs,” Gaston said. “He’s trying to keep the PBGC [Pension Benefit Guaranty Corporation)] from running out of money, and to make sure workers get the benefits they’ve been promised. This is really sucking away oxygen from him and his staff. He’s about to get the keys to the castle, but he has headwinds elsewhere.”

© 2018 RIJ Publishing LLC. All rights reserved.

SEC proposes the use of shorter prospectuses for variable annuities

Posted on November 1, 2018 by -

In a move long-sought by life insurers, the Securities and Exchange Commission is proposing to allow issuers of variable annuities and variable life insurance contracts to use “summary prospectuses” in making their required disclosures to the investing public.

A traditional prospectus can run to hundreds of pages of small print—and even smaller footnotes.

“This document would be a concise, reader‑friendly summary of key facts about the contract.  More‑detailed information about the contract would be available online, and an investor also could choose to have that information delivered in paper or electronic format at no charge,” the SEC said in a release this week.

The Commission has requested public comment until February 15, 2019, on the proposed rule changes, as well as on hypothetical summary prospectus samples that it has published.  The Commission has also published a Feedback Flier that it will use “to seek investor input about what improvements would make the summary prospectus easier to read and understand, and what information investors would like to see included,” the release said.

© 2018 RIJ Publishing LLC. All rights reserved.

Income annuity tied to debit card with cash rewards is launched

Posted on November 1, 2018 by -

Here’s a novel way to market single-premium immediate annuities.

Relay, an service that couples a Guggenheim Life and Annuity immediate period-certain annuity with a prepaid debit card offering cash back rewards, has been launched by
“insurtech” firm Group1001, according to a release this week.

Relay provides a monthly cash flow stream over a predefined term and cash-back rewards of 3% to 13% each year, depending on the length of the plan selected. It claims to “eliminate [purchase] restrictions typical in these categories.”

For instance, a person can go to the RelayRewards website and decide that they want to pre-pay $1,000 in monthly expenses for the next five years. The Relay calculator tells them that an annuity paying that amount will require a single premium of $59,677. Each month for the next five years, $1,000 will be added to the person’s RelayRewards debit card.

Purchases made with the card will earn an average reward of $840 per year ($70 per month) for the next five years, or a total of $4,200, according to the calculator. For the sake of comparison, the current quote for a five-year period certain annuity at immediateannuities.com is $1,048 per month.

“Relay delivers on that need with a completely fresh take on annuities,” said Andres Barragan, chief experience office of Group1001, in the release.

Relay is now available in Illinois, Indiana, Massachusetts, and New Jersey, with service expanding to Florida and Texas on November 1st, 2018. Relay will also be available in California in the next few weeks, with additional state expansion planned for the coming months.

Group One Thousand One, LLC is a U.S. insurance holding company, with current combined assets under management of approximately $37 billion as of December 31, 2017. The Relay Visa Prepaid Card is provided by Sunrise Banks, N.A., St. Paul, MN.

© 2018 RIJ Publishing LLC. All rights reserved.

What’s Up, Doc Huffman?

Posted on November 1, 2018 by -

Gary “Doc” Huffman, the chairman and CEO of Ohio National Life, was sitting in a vast ballroom in New York’s Marriott Marquis Hotel Tuesday, waiting with a thousand other life insurance executives to hear former FBI director James Comey deliver a keynote address at LIMRA’s annual conference.

I approached him and asked about his firm’s recent industry-rattling decision to discontinue certain compensation to distributors on its once-popular but closed ONCore Lite and other variable annuity (VA) contracts with guaranteed minimum income benefits.

I told him about the perception among advisors that Ohio National is taking fees from contract owners and not passing them through to the intermediaries. I also asked why Ohio National shut down its annuity business.

With respect to the last question, Huffman (who ceded the role of president to Chris Carlson earlier this year) told RIJ that Ohio National looked at rising stock market values, saw the growing risk to its book of VA business, and decided it was time to contain the risk. (Over the past six months, the company has made two offers, one still open, to buy certain contract owners out of certain contracts.) He said the company’s move out of annuities wasn’t sudden, but rather the culmination of a five-year plan.

That’s nothing Huffman hasn’t said before; the Cincinnati press reported it two months ago.

But let’s consider the compensation issue, and its linkage to the larger question of possibly exaggerated living benefit guarantees.

The issuer of a deferred annuity with an income benefit knows that producers will jump on a contract that promises a great payout rate (typically beginning several years after purchase). The issuer also knows that its actuaries can pump up those promises by tweaking age-related payout percentages, rider fees, deferral periods, deferral bonuses, and expected surrender or lapse rates. The income benefit is optional, after all, and it is assumed that not everyone who pays for the option will exercise it.

Though a notional number, the promised payout rate carries credibility. It’s a guarantee, after all, based on the superior strength rating of the carrier. Broker-dealer reps know an under-priced annuity contract when they see one. Premiums roll in. Contract owners pay an annual one percent fee for the guarantee.

A few years down the road, if premiums and equity prices combine to increase the carrier’s liability on the product, perhaps requiring more reserves, the carrier closes the contract to new sales. Later, if liabilities continue to climb, it may offer to buy back the riskiest contracts (i.e., the ones that are most valuable to the owners). It can even, apparently, find a reason to end deferred compensation.

If you’ve ever seen Mel Brooks’ 1967 movie, “The Producers,” starring the incomparable Zero Mostel and Gene Wilder, you may notice a similar conflict. All goes well only if the audience walks out at intermission.

Huffman said Ohio National has relationships only with broker-dealers (B/Ds), not advisors, and that it is still paying “service fees” to B/Ds. The service fees are paid to the B/Ds to help market the contracts; they are not related to producer trail compensation. Huffman said B/Ds might use these fees to compensate advisors or producers so that they could continue to service these contracts.

A B/D executive told me that Huffman’s statement matches the executive’s understanding of the situation except for the “fact that they [Ohio National] are not paying the ‘service fee’ on about 70% of our assets [in Ohio National VA contracts].” An independent advisor with a large book of VA business with Ohio National, for whom losing a 1% annual trail is meaningful, said the service fees to B/Ds are a fraction of the producer trail fees, and that no one’s offering him either one.

Variable annuities with guaranteed lifetime income benefits are labor-intensive, the advisor told RIJ. Circumstances are constantly changing. Retired clients’ needs for income are subject to sudden changes (such as after the death of a spouse). The value of the living benefit guarantee can fluctuate with market performance. Excess withdrawals and forbidden asset allocation changes can jeopardize the guarantees.

Moreover, the income option can be exercised only on certain dates or during certain windows of time. Advisors look to trail commissions, as opposed to one-time upfront commissions, to compensate them for monitoring the situation over the life of the contract, which can last decades.

Disputes like this one can only worsen perceptions of the annuity industry. (See last Monday’s scathing critique in the Wall Street Journal). Several years ago, after the financial crisis, several life insurers offered to buy back rich VA contracts. It rattled producers’ faith in annuities. Such events certainly don’t encourage advisors who have never sold deferred variable annuities to start recommending them to clients.

Policyholders, meanwhile, are in danger of paying advisor-related fees without getting the advice that the fees are supposed to cover. And without timely attention from their advisors, they could inadvertently violate the terms of their contracts and lose benefits that they’ve paid thousands of dollars in rider fees to maintain. The possibility of lawsuits, not surprisingly, has been raised.

© 2018 RIJ Publishing LLC. All rights reserved.

Expect a Rocky Return to ‘Normal Valuations’

Posted on November 1, 2018 by -

The Standard and Poor’s 500 index of share prices has fluctuated wildly during 2018 but has returned to nearly the same level that it was at the beginning of the year. The absence of a net fall for the year reflects the combination of a rise in corporate profits and a 12% decline in the price-earnings ratio. And the fall in the price-earnings ratio is an indication of the likely evolution of share prices in the next few years.

The price/earnings (P/E) ratio is now 40% higher than its historic average. Its rise reflects the very low interest rates that have prevailed since the US Federal Reserve cut the federal funds interest rate to near zero in 2008. As long-term interest rates rise, however, share prices will be less attractive to investors and will decline.

A key sign of this is that the yield on ten-year Treasury bonds has doubled in the past two years. But, at a little over 3%, it is still barely above the rate of inflation, which averaged 2.9% over the past 12 months. Three forces will cause the long-term interest rate to continue to rise.

First, the Fed is raising the short-term federal funds rate and projects that it will increase from a little over 2% to about 3.5% by the end of 2020.

Second, the very large projected budget deficits will cause long-term rates to rise in order to induce investors to absorb the increased volume of government debt. According to the Congressional Budget Office, the volume of publicly held debt will rise from about $15 trillion now to nearly $30 trillion by the end of the decade.

Third, the very low and falling rate of unemployment will cause inflation to accelerate. Investors will demand higher yields on bonds to compensate for the resulting loss of purchasing power.

It would not be surprising if the rate on ten-year Treasury bonds rises to 5% or more over the next few years. With an inflation rate of 3%, the real yield will be back to a normal historic level of over 2%.

This normalization of the ten-year interest rate could cause the P/E ratio to return to its historical benchmark. A decline of that magnitude, from its current level of 40% above the historic average, would cause household wealth to shrink by about $8 trillion.

The historic relationship between household wealth and consumer spending implies that the annual level of household consumption would decline by about 1.5% of GDP. That fall in household demand, and the induced decline in business investment, would push the US economy into recession.

Most recessions in the United States have been relatively short and shallow, with durations of less than a year between the beginning of the downturn and the date when the recovery begins. The recession that began in 2007 was much longer and deeper because of the collapse of financial institutions. The faster and more robust recoveries that characterized most previous recessions reflected aggressive countercyclical monetary policy by the Fed, which cut the short-term interest rate very sharply.

But if a recession begins as soon as 2020, the Fed will not be in a position to reduce the federal funds rate significantly. Indeed, the Fed now projects the federal funds rate at the end of 2020 to be less than 3.5%. In that case, monetary policy would be unable to combat an economic downturn.

The alternative is to rely on fiscal stimulus, achieved by cutting taxes or increasing spending. But with annual budget deficits of $1 trillion and government debt heading toward 100% of GDP, a stimulus package would be politically difficult to enact.

As a result, the next economic downturn is likely to be deeper and longer than would otherwise be the case. If the government at that time chooses to use fiscal policy, the future debt-to-GDP ratio will rise further above 100% of GDP, forcing long-term interest rates even higher. It is not an attractive outlook.

Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984.

© 2018 Project Syndicate.

‘Roll-in’ specialist exceeds $4 billion in account consolidations

Posted on November 1, 2018 by -

Retirement Clearinghouse (RCH), which specializes in automating the movement of savings from one retirement account to another when plan participants change jobs, said that it has completed consolidations for more than 155,000 retirement accounts with over $4 billion in total assets as of October 26, 2018.

RCH works with plan sponsors, record-keepers, and participants to complete assisted rollovers, automatic rollovers, assisted roll-ins, and automatic “roll-ins,” which transfer and consolidate retirement savings into a participant’s existing 401(k) or IRA accounts.

In a release, Charlotte, NC-based RCH said it has assisted rollovers into existing IRAs, numbering 82,700 accounts with $2.9 billion in total saving into existing IRAs. It has also facilitated “roll-ins” of more than $980 million in assets from 46,700 accounts to participants’ current-employer 401(k) plan. The roll-ins included more than 1,000 automatic transfers completed by the year-old RCH Auto Portability service.

RCH Auto Portability consists of:

  • An electronic-record “location” function to search and identify instances where an individual has multiple retirement accounts.
  • A proprietary “match” algorithm confirming that the located accounts belong to the same participant.
  • Receipt of the participant’s affirmative consent for the transfer of their assets in an automated roll-in transaction, either electronically or via a representative.
  • The implementation and completion of the automated roll-in transaction.

Originally established as RolloverSystems in 2001, Charlotte, N.C.-based Retirement Clearinghouse works with more than 24,000 retirement plans and has helped guide over 1.3 million plan participants with more than $19 billion in retirement savings. Retirement Clearinghouse is a portfolio company of The RLJ Companies, founded by Robert L. Johnson.

© 2018 RIJ Publishing LLC. All rights reserved.

Managed wealth exceeds $46 trillion in US: Cerulli

Posted on November 1, 2018 by -

The U.S. professionally managed wealth market surpassed $46 trillion in total assets during 2017, increasing 14.9% year over year. The split of assets between institutional and retail clients continues to shift toward retail, closing 2017 with 47.8% attributed to retail channels, according to a new report from Cerulli Associates.

Retail assets have largely outpaced institutional client assets in terms of growth over the last decade. This can be attributed to greater equity exposure in retail channels, and to increasing amounts of assets migrating from institutional channels to retail channels (e.g., individual retirement account rollovers).

In addition, institutional asset owners (corporate defined benefit and state and local defined benefit plans) hold a significant amount of fixed-income assets, which have not performed as well as equities due to extended periods of low interest rates. Opportunity continues to exist in the institutional channels, but asset managers cannot afford to ignore the development and distribution of retail products.

“As asset managers look to the future of product development and strategy, they should carefully evaluate several key factors,” said Brendan Powers, senior analyst at Cerulli Associates, in a press release. “These include increased demand for low-cost index options, fee pressure, and commoditization.”

The report cites expanded investment vehicle offerings, increased use of environmental, social, and governance (ESG) factors, and broadened deployment of multi-asset-class solutions as trends to watch for product innovation and distribution.

In terms of distribution, the institutional space is becoming increasingly consultant-intermediated, while the financial intermediary channels are increasingly influenced by broker/dealer home-office and registered investment advisor custodian professional buyers.

Cerulli’s latest report, “The State of U.S. Retail and Institutional Asset Management 2018: Evaluating Channel Opportunities to Increase Assets,” provides an overview of the aggregate U.S. asset management landscape, benefitting both U.S. asset managers and those seeking distribution opportunities in the U.S. It explores all distribution channels, client segments, and product vehicles, with a focus on the interaction between the retail and institutional marketplaces.

© 2018 RIJ Publishing LLC. All rights reserved.