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The Links between Golf and RMDs

Posted on December 6, 2018 by Kerry Pechter -

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.

Greetings from the First ‘Retirement Management Forum’

Posted on December 6, 2018 by Kerry Pechter -

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.”

Annuities ‘Compensate’ Even Short-Lived People

Posted on November 29, 2018 by Kerry Pechter -

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.]

Top 20 Fixed Indexed Annuity Issuers

Posted on November 29, 2018 by No Author -

Where the Income Puck is Going

Posted on November 29, 2018 by Kerry Pechter -

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.

The fastest growing broker-deal channel? Independents

Posted on November 29, 2018 by Editorial Staff -

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.

BlackRock to acquire almost 5% of Envestnet

Posted on November 29, 2018 by Editorial Staff -

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.

Honorable Mention

Posted on November 29, 2018 by Editorial Staff -

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: A come-back year for indexed annuities

Posted on November 29, 2018 by Kerry Pechter -

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.

VA income deferral incentives are working: Ruark

Posted on November 29, 2018 by Editorial Staff -

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.

Jackson to reinsure closed block of John Hancock annuities

Posted on November 22, 2018 by Editorial Staff -

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.

Majority of Americans expect to use robo-advice by 2025

Posted on November 22, 2018 by Editorial Staff -

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).

An Employer Match Makes a Difference

Posted on November 22, 2018 by No Author -

UBS ups its financial wellness game

Posted on November 22, 2018 by Editorial Staff -

UBS Equity Plan Advisory Services (EPAS) has released a financial wellness digital content offering to participants in the retirement plans it serves. The move follows an announcement earlier this year of “a re-imagined and education-focused digital user experience” for more than 800,000 plan participants.

The new content experience delivers videos, infographics, articles and “gamified” content to teach employees about planning, budgeting, saving, managing debt, investing, and retirement.

The offering is based on research on participants’ needs and wants, gathered from UBS’s corporate clients. This included researching HR related topics, such as employee retention, motivation and length of service.

EPAS will collaborate with Napkin Finance, Aon Equity Services and Imprint, to educate participants about equity compensation and their money, said Michael Barry, head of UBS Equity Plan Advisory Services at UBS Financial Services Inc., in a release.

The debut of the digital content is part of a broader financial wellness rollout to UBS’s more than 10,000 corporate clients, clients and prospective clients. The full offering will provide financial assistance from licensed UBS Financial Advisors, including a wellness assessment, seminars and webinars.

Other UBS partners include SigFig, to develop a digital advice platform; Solium, to deliver a platform for Global Equity Plan Administration; BlackRock, to offer Aladdin Risk for Wealth Management for UBS Financial Advisors; and Broadridge, to create a wealth management industry platform.

Tax Cut and Tech Brighten US Economic Outlook

Posted on November 22, 2018 by Stephen Slifer -

“This time is different.” Economists say that all the time, but it never is. But we believe this time really is different largely because of improved fiscal policy and technological developments. The combination of the two is boosting GDP growth, not just for a year or two but for a protracted period, causing our standard of living to climb more rapidly, keeping the inflation rate in check, and fundamentally altering the oil market. The economic future of this country is far brighter today than it was a decade ago.

First, it is difficult to over-estimate the importance of the corporate tax cut. In 2015 and 2016 growth in investment spending came to a halt as business confidence sank. That was the worst performance for investment since the recession. Productivity growth slowed to a trickle. GDP growth shrank to a disappointing 2.0% pace, which became “the new normal.”

But then Trump pushed through his corporate tax package, which included a cut in the corporate tax rate from 35% to 20%, the ability for large multi-national firms to repatriate overseas earnings to the U.S. at a favorable 15% tax rate, an immediate tax deduction for equipment spending, and a massive movement to eliminate unnecessary, conflicting and confusing government regulations. Suddenly corporate confidence soared. Business leaders opened their wallets and began to spend money on investment.

The pickup in investment spending lifted productivity growth from 1% to 2%. That, in turn, boosted GDP growth from a sleepy 2.0% pace to 3.0%.

But is the recent faster GDP growth a temporary spurt triggered by the tax cuts, or something longer lasting? We believe it is the latter. The 20% corporate tax rate is now competitive with almost all other developed countries. Massive deregulation encourages businesses of all types—small firms in particular—to formulate long-term plans and invest accordingly. The tight labor market encourages firms to spend money on technology to make existing employees more efficient, thus increasing output without increasing their headcount. In economic jargon, they are substituting capital for labor, which boosts productivity growth.

If the pickup in investment spending lasts, productivity growth will accelerate from its anemic 1.0% pace to a steady 2.0%. That will boost the economy’s speed by one percentage point from 1.8% to 2.8%. A near-3.0% GDP growth rate is welcome relief from a few years ago.

If GDP growth accelerates by 1.0%, our standard of living will grow by 1.0%, from today’s 1.5% to 2.5% by the end of the decade. This faster GDP growth comes about partly because of the fiscal policy described above, but also because of technology.

Technology has altered our way of doing business. The Internet came into existence in 1995. The cloud and apps followed in the early 2000s. Those developments revolutionized the way that we all communicate with each other.

Amazon was founded in 1994 and followed quickly by eBay and Google. On-line shopping skyrocketed. Before we purchase anything today, we check prices on the Internet. We can find the lowest price anywhere around the globe. As a result, traditional brick and mortar stores have no pricing power. Should they choose to raise prices, they lose sales. This is having a profound influence on the inflation rate.

In the past year the core CPI has risen 2.2%. If we split the CPI into two parts—goods and services—we find very disparate movements. In the past year, goods prices have declined 0.3%. In contrast, services have risen 3.0%. This outcome highlights the complete inability of goods-producing firms to raise prices.

In the absence of online shopping, we would be looking at a 3.0% inflation rate today rather than 2.0%. That would be far above the Fed’s 2.0% inflation target, and with 3.0% GDP growth (well in excess of the Fed’s estimated 1.8% potential growth) the Fed would be raising interest rates aggressively and the end of the expansion would almost certainly be in sight. But technology has changed that scenario. Inflation remains close to the Fed’s target, which means the Fed can pursue a very gradual return to higher rates with little risk of dumping the economy into recession. All because of technology.

Finally, think about the oil market. Technological improvements like fracking and horizontal drilling have caused U.S. oil production to double in the past seven years.

As a result, the U.S. has surpassed Saudi Arabia and Russia and become the world’s largest producer of crude oil. Next year the U.S. Department of Energy expects U.S. output to climb an additional 10% and further widen the gap between U.S. production and that of its two closest rivals. As a result, OPEC countries no longer have a stranglehold on global oil production. Should they choose to curtail production to inflate oil prices, U.S. drillers can quickly step on the gas and counter much of the shortfall. The U.S. has become a major player in the global oil market. Because of technology.

The world is a different place today than it was 10 years ago. Improved fiscal policy caused by the tax cuts and deregulation have re-invigorated the previously dormant U.S. economy. Technology has changed the entire economic landscape. Because economists have no relevant history to use as a model for the future, we are all flying by the seat of our pants. I believe sustained investment spending and faster productivity growth will boost potential GDP growth from 1.8% to 2.8% within a few years. Others think the recent GDP surge will soon fade and that a recession is looming by 2020. Who is right?

Then, to what extent can we count on technology to suppress inflation?

Finally, how much has the revival of U.S. oil production altered the balance of power between OPEC countries and the rest of the world? What does that mean for oil prices?

Keep in mind that technology is not static, which raises even bigger question. What next “big thing” will fundamentally alter the economic landscape? These sea changes make economics fun—but also challenging.

Dutch pensions face possible benefit cuts

Posted on November 22, 2018 by Editorial Staff -

Falling equity markets and lower interest rates hurt the funding levels of the four largest Dutch pension funds in October, prompting them to contemplate benefits cuts to participants, IPE.com reported.

Two metal industry pensions, PMT and PME, drew closer to imposing benefit cuts in 2020 after figures published last week showed that their funding ratios had declined three percentage points, to about 101%.

PME said it had already been communicating to members the risk of cuts through all its information channels during the past year. “We are trying to find a balance between warning and unnecessarily worrying our participants,” it said. Cuts can be spread out over a 10-year period, but they are unconditional and cannot be reversed.

The MSCI World index declined by 6.7% during October and the 30-year swap rate dropped almost three basis points, to 1.5%. Interest rates are crucial for discounting future pension liabilities.

Civil service pension ABP saw the value of its assets drop 2.8% to €407bn, while its liabilities rose 0.1% to €399bn. To avoid benefit cuts, its funding ratio must rebound to the required minimum of about 105% by year-end. Benefit cuts must be applied when a plan has been underfunded for five consecutive years.

To PMT and PME, their funding at the end of 2019 will be crucial to avoid cuts. At the end of October, their coverage ratios stood at 102.5% and 101.7%, respectively, compared to the required 104.3%.

Honorable Mention

Posted on November 22, 2018 by Editorial Staff -

Amid rising sales, Lincoln issues new bonus FIA

Lincoln Financial Group this week launched the Lincoln OptiBlend Plus fixed indexed annuity (FIA), which offers the same fixed and indexed accounts as Lincoln OptiBlend 10, plus an immediate 6% bonus added to the account value.

The product offers three index-linked interest crediting strategies in addition to a fixed account option for accumulation.

An optional lifetime income rider, Lincoln Lifetime Income Edge, is also available with Lincoln OptiBlend Plus and can be elected at issue or added on a contract anniversary for an additional cost.

“Lincoln OptiBlend Plus builds on the success we’ve seen with our Lincoln OptiBlend 10 fixed indexed annuity,” said Tad Fifer, head of Fixed Annuity Sales and RIA Sales & Strategy at Lincoln Financial Distributors. Expansion in the fixed indexed annuity market has contributed to Lincoln’s fixed annuity sales more than doubling, to nearly $900 million in the third quarter, the Lincoln release said.

Seventy percent of pre-retirees claim they can afford to lose only 10% or less of their savings before feeling forced to adjust their retirement plan or savings goals, a recent Lincoln-sponsored survey showed. Among those less than three years away from retirement, 87% were concerned with protecting their accumulated wealth.

TIAA Bank acquires leases and loans from GE Capital’s healthcare business

TIAA Bank has acquired a $1.5 billion portfolio of healthcare equipment leases and loans from GE Capital’s Healthcare Equipment Finance (HEF) business. The move expands the bank’s commercial banking business and enhances its ability to serve institutional clients and healthcare providers, according to a release from the bank.

The acquired healthcare portfolio includes loans and leases to approximately 1,100 hospitals as well as 3,600 physician practices and diagnostic and imaging centers across the United States. Assets financed include imaging, monitoring, respiratory, surgical, ultrasound and lab equipment.

TIAA Bank and GE Capital have also entered into a five-year vendor financing agreement for U.S. customers of GE Healthcare. GE Healthcare Equipment Finance’s team will continue to originate and service transactions under a co-branding arrangement with TIAA Bank.

Executives involved in the deal include Lori Dickerson Fouché, senior executive vice president and CEO of Retail & Institutional Financial Services at TIAA, Blake Wilson, CEO of TIAA’s Retail Financial Services and chairman and CEO of TIAA Bank, and Trevor Schauenberg, president and CEO of GE Capital Industrial Finance.

MassMutual names Carroll as new head of Workplace Distribution

MassMutual has appointed Bob Carroll as its new head of Workplace Distribution. Reporting to Teresa Hassara, head of Workplace Solutions for MassMutual, he will be responsible for executing the firm’s workplace distribution strategy, developing sales talent, increasing revenue and growing MassMutual’s share of the retirement and worksite markets.

Carroll will also represent MassMutual as a thought leader in the retirement and voluntary benefits markets, and partner with key accounts and relationship management teams to drive business growth and retention, a MassMutual release said.

Carroll comes to MassMutual from John Hancock Financial Services, where he was most recently Vice President of National Sales, spearheading strategy for retirement plan product development, marketing, and product distribution through broker dealers, RIAs, and third-party administrators. Previously, he served in a variety of sales leadership roles at Hancock.

Carroll has a Bachelor of Science in Finance and Business Administration from Illinois State University and Series 7, 24 and 63 licenses.

MassMutual provides retirement savings plans through advisors for mid-, large and mega-sized employers in the corporate, Taft-Hartley, government and not-for-profit markets. Its voluntary group benefit offerings include whole life, universal life insurance, critical illness and accident coverage, and executive life and disability income insurance.

The company maintains two nationwide wholesaling networks, including 70 managing directors who support retirement plans in the institutional and emerging markets, and 15 voluntary benefits wholesalers. MassMutual said it plans to expand its voluntary benefits wholesaling team to 21.

Investors Heritage Life enters MYGA annuity business

Investors Heritage Life, a Kentucky-domiciled life insurer specializing in preneed life and final expense insurance, has launched Heritage Builder Annuity, a single-premium deferred, multi-year, rate-guaranteed (MYGA) annuity.

The annuity marks the first product introduced Investors Heritage went private in a transaction with Aquarian Holdings in March, said Harry Lee Waterfield II, Investors Heritage CEO, and John Frye, operating partner at Aquarian, in a release.

The Heritage Builder Annuity was developed after consultations between Investors Heritage, Aquarian and leading annuity distribution companies, the release said. Investors Heritage and Aquarian also refreshed the insurer’s brand and launched a new website in September.

Rudy Sahay, chairman of Investors Heritage and managing partner at Aquarian Holdings, said in a statement that “this annuity [will be] the first of many to come.”

Employer Match vs. Auto-Enrollment; The Winner Is…

Posted on November 22, 2018 by Kerry Pechter -

As sponsors of 401(k) plans, employers can boost plan participation by automatically enrolling new employees in plans–a practice made possible by the Pension Protection Act of 2006). They can also raise participation and contribution rates by matching a portion of each employee’s contributions.

There’s been some debate over the years about which factor—auto-enrollment or the (more expensive for the employer) match—drives participation more. A study by a team of Harvard and Yale economists in 2007 showed that most auto-enrolled participants will stay in a plan even if the employer suspends its match.

The match may be more important than previously thought, however. The results of a recent study by analysts Nadia Karamcheva and Justin Falk of the Congressional Budget Office’s Microeconomic Studies Division found that “most of the estimates from the literature substantially understate the effect of matching.”

The analysts took advantage of two natural experiments. Before 1984, the federal government offered only a defined benefit pension (without Social Security). In 1984, it began offering federal employees a defined contribution plan (the Thrift Savings Plan or TSP) with a match. It allowed people under the old CSRS system to also contribute to TSP, but with no match. This change provided an opportunity to test the impact of a match on contribution rates.

The second natural experiment took place in August 2010, when the government implemented a policy of automatic enrollment with a default contribution rate of three percent and the “G Fund” as the default investment option. (The G Fund invests in government securities. Its yield is based on the yield for Treasury notes.) This change provided a test of the impact of auto-enrollment.

A microeconomic analysis of the results of these two natural experiments showed that the match had a bigger effect. It increased contribution rates by 22 percentage points. Auto-enrollment increased it by 19 percentage points.

Looking at the long-term impact of the matching contribution, the analysts found that for those with a match, the average ratio of balance to pay was 2.5 to 1 (after an average accumulation period of 28 years). The average ratio of balance to pay for those without a match was 0.8 to 1. Looking at the impact of auto-enrollment (over an average accumulation period of five years), the average ratio of balance to pay was the same (0.4 to 1) for those who were hired just before and just after auto-enrollment was introduced.

In the 2007 Harvard-Yale study, the economists studied the behavior of participants whose plan sponsor switched from a matching contribution to a voluntary employer contribution not contingent on a worker’s contribution. They found that participation rates declined by “at most five to six percentage points” and average contribution rates fell by 0.65%.

Our “results suggest that the match has only a modest impact on opt-out rates,” wrote John Beshears, David Laibson and Brigitte Madrian of Harvard and James Choi of Yale in a 2007 paper, “The Impact of Employer Matching on Savings Plan Participation under Automatic Enrollment.” The same team also looked at data from nine different employers who all used auto-enrollment and varying match structures. It drew similar conclusions.

“We find that a one percentage point decrease in the maximum potential match as a fraction of salary is associated with a 1.8 to 3.8 percentage point decrease in plan participation at six months of eligibility,” the paper said. “We estimate that moving from a typical matching structure of 50% up to 6% of pay contributed to no match would reduce participation under automatic enrollment at six months after plan eligibility by 5 to 11 percentage points.”

The CBO and Harvard studies are quite different, so it’s impossible to say which carries more weight. CBO examined the effect of a match on workers who did not have auto-enrollment, whereas other researchers have looked at the effect of taking away the match from workers who have auto-enrollment.

Fixed annuities see year-over-year sales improvement: Wink

Posted on November 15, 2018 by Editorial Staff -

Non-variable annuity sales for the third quarter of 2018 were up 4.72% over the prior quarter and 46.26% higher than in the same period last year, based on preliminary sales data gathered by Wink’s Sales & Market Report. Non-variable deferred annuities include the indexed annuity, traditional fixed annuity, and MYGA product lines.

Indexed annuity sales increased by more than 2% over the prior quarter and by more than 38% over the same period last year. Indexed annuities have a floor of no less than zero percent and limited excess interest that is determined by the performance of an external index, such as Standard and Poor’s 500.

Traditional fixed annuity sales increased by 16.7% over the prior quarter and rose by 28.7% over the same period last year. Traditional fixed annuities have a fixed rate that is guaranteed for one year only.

Sales of multi-year guaranteed annuities (MYGA) increased by 8.1% over the prior quarter and were up 63.4% over the same period last year. MYGAs have a fixed rate that is guaranteed for more than one year.

“Recent increases in annuity rates, coupled with incentives being offered by product manufacturers have really translated to sales momentum!” said Wink CEO Sheryl Moore.

Structured annuity sales are estimated to be up nearly 40% from the prior quarter. Structured annuities have a limited negative floor and limited excess interest that is determined by the performance of an external index or subaccounts. “These aren’t indexed annuities, although some companies are marketing them in that manner,” Moore said.

These preliminary results are based on 94% of participation in Wink’s quarterly sales survey representing 97% of the total sales.

Wink currently reports on indexed annuity, fixed annuity, multi-year guaranteed annuity, structured annuity, and multiple life insurance lines’ product sales. It plans to report on variable annuity and all types of income annuity product sales in the future, a release said.

Brand-strength of robos is still fairly weak: Cerulli

Posted on November 15, 2018 by Editorial Staff -

Almost six in 10 investors (59%) were not aware of any of names of 10 digital advice platforms that were offered to them in a questionnaire, according to a recent survey of investors by Cerulli Associates, the research and consulting firm.

The ten companies (in order of brand-recognition) were Betterment, Merrill Lynch Edge, Go (Fidelity), Intelligent Portfolios (Schwab), Vanguard Personal Advisory Services, Acorns, Wealthfront, Essential Portfolios (TD Ameritrade) Adaptive Portfolios (E*Trade), and Personal Capital.

Awareness of the names of the ten robo-advisors and robo/human hybrid platforms varied by age. Younger investors, predictably, were more aware of the digital advisors than older ones. The percentage answering “none of the above” after seeing the list ranged from 34% (among those under age 30) to 75% (among those age 70 or older).

Cerulli’s fourth quarter 2018 issue of The Cerulli Edge—U.S. Retail Investor Edition details the efforts of 10 of the leading digital-focused financial advice platforms in establishing brand awareness among retail investors and looks at the degree of familiarity that each firm has achieved among prospective investors on a wealth tier basis.

“While increasing awareness is an excellent near-term goal, the ability to accumulate assets under management will determine the ultimate success of these platforms,” said Scott Smith, director at Cerulli, in a press release.

“The largest platforms are affiliated with firms with a long history of serving investors directly, largely through brokerage relationships. In many cases, investors on these platforms began their relationships with the intention of remaining completely self-directed, but eventually found the responsibility more burdensome than rewarding.

“During the five-year time horizon, conversion of brokerage clients to advisor relationships at the largest direct providers will be the primary driver of the digital advice segment,” Smith said. “But more recent entrants’ persistent efforts will allow them to consistently improve their awareness levels among affluent investors and achieve sustainable scale.”

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To gain trust, banks should write more plainly

Data Connection

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