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What’s Up, Doc Huffman?

Posted on November 1, 2018 by Kerry Pechter -

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.

Expect a Rocky Return to ‘Normal Valuations’

Posted on November 1, 2018 by Martin Feldstein -

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.

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

Posted on November 1, 2018 by Editorial Staff -

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.

Managed wealth exceeds $46 trillion in US: Cerulli

Posted on November 1, 2018 by Editorial Staff -

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.

An Industry Haunted by Its Own History

Posted on November 1, 2018 by Kerry Pechter -

Bob Kerzner, in his final address to the LIMRA membership after 14 popular years as their CEO, posed a perennial question: why hasn’t the life insurance industry capitalized on the Boomer retirement opportunity to the degree that it hoped, expected and, in its mind, deserved to?

A complete answer to that question (which may stem in part from a post-demutualization misalignment of interests with the public) will fill a book someday (see note at end of story).

Bob Kerzner

Kerzner spoke at the annual LIMRA conference, which was held this year at the Marriott Marquis Hotel in New York. As the polyglot mass of tourists posed for snaps with the “Naked Cowboy” et al in Times Square below, a thousand or so dark-suited executives gathered soberly in the hotel ballrooms above.

The conference was ornamented by the appearances of a celebrity guest speaker, former FBI director James Comey, and an inspirational TED talker, Simon Sinek (pronounced “cynic”). Both spoke of one’s duty to callings higher than achieving sales goals; both were also promoting new books.

The most productive breakout session at the conference, for annuity issuers at least, may have been a discussion about potential synergies between various annuity industry stakeholders. Robert DeChellis, CEO of Allianz Life Financial Services, moderated a panel consisting of Gumer Alvero of Ameriprise, Zach Bevevino of BlackRock and George Riedel of T. Rowe Price.

Robert DeChellis

Their conversation shed as much light on the differences between the interests of assets managers, retail advisors, and institutional providers as it did on their similarities. The panelists explained, as panels of distributors have explained during nearly identical discussions at past conferences, that they face their own challenges, which are not necessarily related to annuities.

BlackRock’s income fund

Bevevino, product strategist for BlackRock’s Multi-Asset Group, explained that while BlackRock manages about $300 billion for variable annuity issuers, and while its CEO, Larry Fink, declared that retirement is the big asset manager’s top priority, the company is more focused on satisfying demand for safe income with a non-insurance product.

Zach Bevevino

That product is the Multi-Asset Income Fund, and BlackRock is struggling with it. The fund is designed to yield a steady 5% a year, Bevevino said, but “hasn’t sold well in retail channels. Why do retirees not understand what they need? We have a whole working group with a research component looking at this.”

[But that product is expensive. It is actively managed and has lagged its benchmark after accounting for fee drag. The A-share assesses a 5.25% front-end load. The C-share charges 1% upfront and 1.59% per year. The institutional class charges a mere 0.57% per year but requires a $2 million investment.]

Regarding annuities, BlackRock has a web portal, iRetire, where advisors can access “retirement income planning technology… for use alongside clients.” It solves income plans using one of five BlackRock model portfolios: Tax Aware, Target Allocation, ESG (environmental, social and governance), Smart Beta, and Income.

“iRetire helps us sell annuities,” Bevevino said. “The interface lets advisors include essential spendings in their plans and choose the right model portfolio. But the through-put has been very slow with advisors and clients. We’re trying to lubricate that a little.”

The fact remains, he said, that in BlackRock’s world, where investors can find funds that charge for five to eight basis points, the cost and complexity of annuities loom large.

The Naked Cowboy of Times Square

Ameriprise ‘adaptive withdrawal’

Gumer Alvero, executive vice president for annuities at Ameriprise, said that his advisors are more focused on encouraging “adaptive withdrawal” from investment portfolios as an income strategy for retirees and that “the consumer isn’t looking” for things like variable annuities with guaranteed lifetime withdrawal benefits, given the fees and complexities.

“We’ve had a variety of GLWBs [guaranteed lifetime withdrawal benefits], but we’re seeing only about a 20% take-rate on contracts with the richer benefits,” he said. “The industry is going for another arms races in the opposite direction” as the public.

Gumer Alvero

“I’m surprised to see the recent sales increase, because I think they’re missing the boat.” Alvero told RIJ that high payout rates on living benefits don’t appeal to retirees “because they don’t want to spend their money that fast.”

In general, Ameriprise practices the “floor and upside” approach to retirement income planning, where the retiree meets essential expenses with guaranteed or safe income. The balance of savings can be invested in risky assets. The withdrawal rate will vary, depending on market conditions. “Four percent is only the most conservative withdrawal rate over 30 years,” he said. “You could have withdrawn 15% a year from savings if you happened to retire at the right time.”

T. Rowe Price: Enough balance sheet?

George Riedel of T. Rowe Price, one of the big-three providers (with Fidelity and Vanguard) of target date funds to 401(k) participants, said that his firm has “hundreds of people looking at what embedding annuities in 401(k) plans might mean.” He sees a mismatch between the costs of annuities and the current priorities of large plan sponsors, who are focused on minimizing the costs of their plans.

George Riedel

If millions of 401(k) participants decided to annuitize part of their savings, he noted, life insurers wouldn’t be able to handle all the longevity risk. “Is there enough balance sheet in America?” he asked. (That helps explain Social Security; it takes a national government to handle a nation’s collective longevity risk.)

T. Rowe Price, which specializes in actively managed funds, faces the challenge faced by all asset managers who distribute mutual funds through 401(k) plans: How to deal with the ongoing flood of dollars from plan accounts to rollover IRAs. The only solution is to get their products on the shelves of the broker-dealers who manage IRA money.

James Comey: ‘You have to interrupt him’

The former FBI director, who says he was fired in 2017 for refusing to pledge his loyalty to Donald Trump, compared him unfavorably with former Presidents Obama and George W. Bush and with candidates John McCain and Mitt Romney. A leader needs to be able to listen, especially to dissenting opinions, “but to speak to [Trump] you have to interrupt him,” Comey said.

Obama, he continued, once asked him into the Oval Office and, after shooing everyone else from the room, asked for Comey’s views on the spike in police shootings of black men in U.S. cities.

“He didn’t speak for 10 minutes. He just drank it in, and then he asked questions. It was one of the most impressive things I’ve ever seen. Actual listening happens very rarely in Washington. Instead, one person will say what they want to say, and then the other person will ignore it and say what they want to say.”

Note: At the top of this story, a link was drawn between demutualization and the industry’s current troubles. In the 1990s, many large members of the life insurance industry chose to become public companies and to shed their captive sales forces.

It’s arguable that, at that point, the policyholders began to take a backseat to the shareholder and to the third-party distributors on whom the industry began relying for sales. Since then, the resulting conflicts keep bubbling up, like rust through a thin coat of paint. The ghost of demutualization and its consequences, including a loss of public trust, haunt much of the annuity industry today.

Honorable Mention

Posted on October 25, 2018 by Kerry Pechter -

Arthur Laffer, the supply-sider, dabbles in financial wellness

My Financial Coach, the robo-advisor co-founded by “supply-side” economist Arthur Laffer, has launched a website designed to help employees coordinate and their personal assets with their employer-provided benefits.

A Yale- and Stanford-educated economist who leaped onto the national stage as an advisor to Ronald Reagan in the 1980s, Laffer provided academic support for the notion that, if extremely high taxes can discourage economic activity and reduce tax revenues, extremely low taxes could do the opposite.

Republican intellectuals, officials and policymakers from Jude Wanniski to David Stockman to George W. Bush and Donald Trump have used the idea to justify dramatic tax cuts. But the policy uniformly produced budget deficits, not increases in revenues–as in Kansas under Governor Sam Brownback in 2012.

The MFC program is a corporate-sponsored group benefit that enables employees to

Turn to Certified Financial Planners (CFP) as financial coaches for independent fiduciary advice, then self-invest, or
Use our financial coaches to augment work with the employee’s existing advisors
Use our coaching service to access subject matter experts for help with financial planning and implementation.

Principals of MFC include Laffer, Chris Cruttenden of Cruttenden Partners, William L. MacDonald, and Andy Ramey.

Enpo Tu, newly appointed chief operating officer of MFC, Tu was a planner for LearnVest, a financial representative for Bank of America, and a financial consultant for AXA-Advisors.

The company’s CFPs serve as unbiased, non-selling coaches. A support team of subject matter experts (SME) includes retirement planners, money managers, insurance experts, estate planning lawyers, and tax specialists. Both CFPs and SMEs work with the employer’s human resources team. Users access live chat, phone and email on mobile and desktop platforms, and 24/7 email support for advice and information.

Through a single access point, MFC’s SmartTech system lets view

Financial accounts
Tax and legal documents
Insurance coverages
Investments
Annuities
Individual retirement accounts
401(k)s
Employer compensation and benefits plans
Stock options
Restricted stock units and shares
Real estate holdings
Estate planning documents
Wills, trusts and deeds.

Users can store all documents in an online vault and collaborate with their coach or other advisors remotely.

BBVA launches robo-advice tool on BNY Mellon Pershing platform

SmartPath Digital Portfolios, a new digital advice solution available on BNY Mellon Pershing’s advisory platform, has been launched by BBVA Wealth Solutions to help “investment advisors achieve increased efficiencies and scale” and to help investors choose from “a selection of managed account options.”

Banco Bilbao Vizcaya Argentaria (BBVA) is the second largest bank in Spain. It was formed from a merger of Banco Bilbao Vizcaya and Argentaria in 1999. The company is a constituent of the IBEX 35 and Euro Stoxx 50 stock market index.

“We provide actively managed models that leverage non-proprietary ETFs,” said Bruce Hagemann, head of Investment Services for BBVA Compass and CEO of BWS (BBVA Wealth Solutions). The system assesses clients according to five different risk models, a BBVA release said.

SmartPath Digital Portfolios uses a risk tolerance and time horizon-based questionnaire to help clients choose investments. It charges an annual asset-based fee of 0.75% (i.e., $75 on the minimum $10,000 initial investment). There are no additional trading or rebalancing fees.

SmartPath Digital Portfolios is based on Pershing’s Digital Portfolios, which integrates Pershing’s investor platform, NetXInvestor, with the firm’s investment advisory solutions. SmartPath leverages Lockwood WealthStart Portfolios, which is designed to serve “emerging and mass affluent” investors rather than high net worth investors. It incorporates five out of six WealthStart models with traditional and nontraditional asset classes, leveraging non-proprietary ETFs.

Pershing’s Digital Portfolios is based on plug-and-play software that provides Pershing clients with full customization options and can be reconfigured based on specific client needs.

Migration to bonds finally reverses: TrimTabs

Bond funds, battered by months of losses, are on track for their first outflow in almost two years and their biggest monthly outflow in nearly three years, according to a new report from TrimTabs Research.

But bond mutual funds and exchange-traded funds have shed $23.6 billion in October through Friday, October 19. This month’s outflow is set to be the first since December 2016 and the largest since at least December 2015, when bond funds lost $24.1 billion.

“The Fed isn’t the one only cutting back on its bond holdings, and the recent selling by fund investors is a massive change in trend,” said David Santschi, Director of Liquidity Research at TrimTabs.

Before October, bond funds had 21 consecutive monthly inflows. Moreover, investors pumped a staggering $829.2 billion into bond funds in the five years ended in September.

Months of losses are finally catching up to bond funds. Bond funds are down 1.0% in October, bringing their year-to-date losses to 4.0%.

At the sector level, corporate bond funds have been sold much harder than Treasury bond funds this month despite similar performance. Corporate-bond ETFs have shed $5.8 billion (3.7% of assets)—including a five-day outflow that was the biggest on record—as they have dropped 1.4%. By contrast, Treasury bond ETF flows have been flat even though these funds are down 1.6%.

Brighthouse makes it easier for advisors to sell its annuities

Posted on October 25, 2018 by Editorial Staff -

Brighthouse Financial has launched the Brighthouse Financial Digital Desk, an online platform designed for firms to help their advisors process fixed annuity sales.

Advisors can use Digital Desk to educate clients about fixed deferred and fixed income annuities and to demonstrate the value of those products in a client’s portfolio. Advisors can submit a suitability questionnaire and application electronically for faster processing and issue.

“This can help firms without a fixed suitability process in place, allowing them to add fixed and income products to their shelf,” said Myles Lambert, chief distribution and marketing officer, Brighthouse Financial, in a release.

The Digital Desk supports four Brighthouse Financial fixed and income annuities, including its new Brighthouse Fixed Rate Annuity and Brighthouse Fixed Rate Annuity MVA (market value-adjusted). The platform also supports the Brighthouse Income Annuity and Brighthouse Guaranteed Income Builder fixed deferred income annuity.

Outstanding Household Debt 2Q2018

Posted on October 25, 2018 by No Author -

House Passes Family Savings Act of 2018

Posted on October 25, 2018 by Wagner Law Group -

Last month, the House of Representatives, as part of Tax Reform 2.0, adopted the Family Savings Act of 2018 (“Act”). No action will be taken on this bill until after the mid-term elections, but there is a possibility that the Senate will take action on this issue during the lame-duck session, and attempt to reconcile it with the Retirement Enhancement and Savings Act of 2018, a bipartisan bill originated by Senators Hatch and Wyden.
In addition to some technical changes, the Act would make a number of changes to the rules governing retirement plans.
The Act would exempt individuals with less than $50,000 across all eligible retirement plans (other than defined benefit pension plans) from the required minimum distribution rules. It would also repeal the maximum age for contributions to a traditional IRA, which is currently 70½. The Act would permit penalty free withdrawal from retirement plans for individuals in the case of birth or adoption of a child, and would allow those funds to be recontributed.
The Act would also permit open multiple employer plans, and eliminate the “one bad apple” rule which causes the plans of all participating employers in the multiple employer plan to be adversely affected by an action of one participating employer that affects the plan’s tax qualified plan status.
The Act would also allow employees who have an annuity in a 401(k) plan or similar plan to transfer the annuity to an individual retirement account without paying taxes on the distribution.
The Act also contains a safe harbor for the election of annuity providers, which is intended to encourage the adoption of annuities as a distribution option in 401(k) plans and other defined contribution plans. The Act would modify the nondiscrimination rules for frozen defined benefit plans to allow older, longer service, and frequently highly compensated employees to continue to accrue benefits, provided certain conditions are satisfied. The Act would prohibit tax-qualified plans from making loans through credit cards, and allow an extended period of time for a tax qualified plan to be adopted. Under current law, it must be adopted by the last day of an employer’s taxable year, but the proposal would permit adoption through the date of filing the employer’s tax return (including extensions). The Act would also change the rules for the nonelective contribution 401(k) safe harbor, such as the elimination of the safe harbor notice requirements and delaying the adoption of provisions for such safe harbor contributions.
The Act would also permit an individual to establish a universal savings account, to which an individual could contribute an amount not in excess of $2,500 annually, and withdraw those funds tax free and without penalty at any time and for any purpose. The Act would also make four modifications to Internal Revenue Code Section 529 Education Savings Plans. First, the proposal allows distributions to be used for higher education expenses to apply to expenses for books, supplies, equipment, and fees for participation in an apprenticeship program. Second, the bill would allow distributions to be used for home schooling expenses, an item that was deleted from the Tax Cuts and Jobs Act at the last moment on technical procedural grounds. Third, the bill allows expenses for fees, academic tutoring, special needs services, books supplies and other equipment as additional qualifying expenses for elementary and secondary schools. Fourth, the proposal allows some distributions to be used to make payments of principal or interest on a qualified education loan.

DOL issues regulations regarding multiple employer pension plans

Posted on October 25, 2018 by Wagner Law Group -

On October 22, 2018, the Department of Labor (DOL) issued a proposed regulation in response to President Trump’s August 31, 2018 Executive Order to remove regulatory burdens faced by multiple employer pension plans (“MEPs”).

While there are generally four types of MEPs, the proposal modifies the rules for so-called “closed” MEPs and clarifies rules with respect to MEPs sponsored by a professional employer organization (“PEO”). The proposed regulations provide that a bona fide group or association of employers and bona fide PEOs are deemed to be acting in the interests of an employer, and thus, can establish a pension plan so long as they satisfy the DOL’s regulatory requirements.

“Closed” MEPs: Bona Fide Employer Groups or Associations

A “closed” MEP refers to a MEP for which the participating employers have a sufficiently close economic or representational nexus allowing it to be treated as a single MEP for ERISA purposes. The advantages of a “closed” MEP structure include the requirement of only a single audit, bond and Form 5500 Annual Returns/Report. DOL guidance refers to the participating entities of closed MEPs as “bona fide” employer groups or associations.
Under the proposed regulations, the group or association of employers is considered bona fide if seven requirements are met. The requirements are substantially the same as the requirements applicable to association health plans under recently issued final DOL regulations. They are:
(1) The primary purpose of the group or association may be to offer and provide MEP coverage to its employer members and their employees, provided, however, the organization must have at least one substantial business purpose unrelated to the offering and providing of MEP coverage and benefits. A business purpose includes common business interests of its members or the common economic interests in a given trade or employer community. The proposed regulations contain a safe harbor: a substantial business purpose is deemed to exist if the group or association would be a viable entity in the absence of considering the establishment of a pension plan.
(2) Each employer member of the group participating in the plan is a person acting directly as an employer of at least one employee participating in the plan, including a working owner.
(3) The group or association has a formal organizational structure with a governing body and has by-laws or other similar indications of formality.
(4) The functions and activities of the group or association are controlled by its employer members, and the group’s or association’s participating employers control the plan.
(5) The employers have a commonality of interest. A commonality of interest exists if either:

(i) the employers are in the same industry, trade, line of business or profession, or

(ii) have a principal place of business that does not exceed the boundaries of a single state or metropolitan area.

(6) Participation in the plan is restricted to employees and former employees of the employer members, and their beneficiaries.
(7) The group or association is not a bank, trust company, insurance issuer, broker-dealer, or other similar financial services firm, other than participation in the group or association as an employer member.

Bona Fide PEOs

The conditions for a bona fide PEO are different than that for closed MEPs in two respects. First, the PEO must have substantial control over the functions and activities of the MEP as the plan sponsor, plan administrator, and named fiduciary. Second, the PEO must perform “substantial employment functions” on behalf of the employers. Whether a PEO meets this requirement is based on a facts and circumstances test under which nine criteria are considered, but not all must be satisfied. The DOL also proposed two safe harbors in order provide more certainty with respect to the substantial employment functions test.
The preamble to the proposal makes it clear that MEP participating employers would retain limited fiduciary responsibilities. Employers would be required to be prudent in the selection and monitoring of service providers and would also be responsible for the timely remittance of contributions to the plan.
One issue not addressed in the proposed regulations, as it is a Treasury Department rather than a DOL issue, is the “one bad apple rule,” under which the action of one participating employer with respect to the MEP can jeopardize the tax qualified status of the MEP for all other participating employers. The Treasury Department is expected to modify this rule. The DOL indicated in the preamble that nothing in the proposed regulations has any effect upon joint employer issues.
As mentioned above, the proposed regulations do not address two other types of MEPs: “open” MEPS and “corporate” MEPs. An “open” MEP is a MEP that covers employees of employers with no relationship other than their joint participation in the MEP. “Open” MEPs are not single retirement plans for ERISA purposes; each adopting employer is treated as having established a separate ERISA plan. Consequently, audit, bond an annual reporting requirements apply to each ERISA plan. A “corporate” MEP covers employees of related employers that are not in the same controlled group or affiliated service group. In the preamble to the proposed regulation, the DOL solicited comments as to whether the final regulations should, in fact, address one or both of these types of MEPs. Currently, there is proposed legislation in both houses of Congress that would permit “open” MEPs if certain conditions are satisfied.

Which Annuities Pay Out the Most?

Posted on October 25, 2018 by Kerry Pechter -

Various digital insurance “platforms” are making it easier for more types of advisors to sell more types of annuities. A dozen years ago, career agents would sell income annuities, insurance agents would sell indexed annuities, and broker-dealer reps would sell variable annuities. Those silos have weakened or crumbled.

So the emergence last year of a comparison tool from Cannex, the annuity data shop, where any type of advisor or producer with access to a participating platform can compare annuities, is timely. Today, advisors can run comparisons within categories using the Cannex engine; cross-category comparisons will be operational soon.

Earlier this month Cannex released a study called “Guaranteed Income Across Annuity Products,” in which it displayed a series of charts indicating the annual income from the five highest-paying products in its databases for single-premium immediate and deferred income annuities (SPIAs and DIAs), fixed indexed annuities (FIAs) and variable annuities (VAs).

The report compared the guaranteed and average income streams stemming from a $100,000 premium invested in SPIAs, DIAs, FIAs and VAs, under various age, gender, and deferral-period scenarios. Payout numbers for the anonymous products were based on contractual guarantees or hypothetical market conditions (for products with market exposure).

Tamiko Toland

“We currently have three services: the Income Exchange, the Variable Annuity Exchange and the FIA Exchange. The systems are silo-ed right now, so you still need to do three separate searches to get a cross-silo view but we wanted to see what it will look like when that service is available. This is a proof-of-concept,” said Tamiko Toland, head of Annuity Research at Cannex.

“The fees are incorporated in our analysis. It doesn’t need to be considered separately. The higher fees are typically associated with richer guarantees. The richer guarantee may also provide a higher value to the client. The tricky thing with FIAs is that many have no explicit fees, so it’s harder to look at it the same way,” she said.

The finding that FIAs offer very competitive income guarantees comes as no surprise; the FIA premium has been driving sales of these products for several years. A closer look at the Cannex data on FIA payouts can be found below.

Outlier advantage

FIAs definitely appear to outshine other products If you’re looking for guaranteed annual income after a 10-year deferral period, FIAs have an definite edge. The study shows that, on a premium of $100,000, the highest-paying FIA would give a 65-year old woman a minimum annual income at age 75 of $14,313. The top-ranked VA would pay ($10,819) and the top ranked deferred income annuity would pay $11,721. For a 65-year-old man, the VA and FIA numbers would be the same, but the DIA would pay $12,960, since gender matters only in those products.

That $14,313 number, however, is an outlier. The other four payouts of the top five FIA products after a ten-year delay for 65-year women were $12,880, $12,000, $11,921 and $11,830. The highest DIA payout was $11,721. For men, the deferred income annuities were competitive with all but the outlier FIA.

When income is taken immediately or when the contract owner is relatively older, income annuities seem to be most competitive, in terms of minimum guaranteed income. For instance, a single male, 65, could get as much as $5,586 each year per $100,000 premium from an immediate annuity. The best FIA and best VA would pay only $5,000.

Variable annuities seemed to provide the most income for couples who receiving payouts at purchase or after a delay of only five years. For a M65 and W60, the top product produced $7,560 in five years and $5,600 immediately. The top FIA paid $7,073 and $4,500 respectively. The top income annuities paid $6,874 and $5,196, respectively. With their equity exposure, VAs performed even better during bull markets.

Lapse-dependent payouts

There are several identifiable reasons why certain products do best in certain situations. Fixed income annuities work best for immediate income in part because the anticipated gains from mortality experience and interest revenue are spread evenly across all payments, starting with the first one. Variable annuities offer the most upside potential in bull markets because they offer equity exposure.

“Their overall message certainly is sound,” said Jon Legan, a principal at AnnuityRateWatch.com, which competes with Cannex, after reviewing the study. “Single premium immediate annuities are priced and design to perform immediately. Also, FIA guaranteed lifetime income scenarios will provide a greater ‘guaranteed’ income because they’re built and designed to have underlying guarantees.

“And of course variable ‘may’ provide for greater income, because [unlike the FIA] they don’t have a guaranteed protection of account value priced into the contract and because they can have higher potential returns. That’s stating the obvious.”

But the payout numbers for FIA are the result of factors that are completely opaque to the advisor and the client. FIAs can offer higher guaranteed payout rates because they know that a high percentage of people who buy the product and pay for the rider for several years will either surrender or exchange the contract or otherwise “lapse” coverage.

As Cannex put it in the study, “With these products, there is always going to be a segment of buyers that never take payments on their guarantees. Assumptions around utilization are built into the cost and, therefore, are ultimately reflected in the value to the client.”

Tim Paris

“If a product is lapse-supported, it can appear to provide very generous benefits over the long-run, but that is done with the expectation that very few will hold onto the product long enough to receive those benefits,” Tim Paris, CEO and actuary at Ruark Consulting, told RIJ.

“For people who surrender the product early, they would tend to not see those generous benefits. And if many people (i.e. more than the issuing company expected) hold onto the product in order to see those generous benefits, that will probably be a very expensive proposition for the issuing company,” he added.

The FIA payout guarantees aren’t teasers—a contractual guarantee is a guarantee. But the issuers of FIAs undoubtedly have more latitude in advertising an industry-leading price than issuers of income annuities, who know they’ll have to deliver on almost all of their promises, not just some of them. So the “reality content” of the numbers in the Cannex charts varies from product to product.

The idea of lapse-supported payouts might pose trouble a fiduciary advisory. He or she may have ethical qualms about steering clients to a non-transparent product or about recommending a product whose income rider is great because many people, for one reason or another, buy it but never use it. Merely celebrating the size of the guarantee won’t banish this paradox from the mind of a sophisticated fee-only advisor or RIA’s investment advisor representative.

Product selection, it has been said, should be the last stop in the retirement income planning process, and the price or yield won’t necessarily be the most important factor in choosing a product.

“Advisors need to know that these products are just different tools in retirement income planning,” said Legan. “One can’t just be dead-set on selling FIAs exclusively. Just like all insurance, annuities are needs-based products. Insurance is inherently needs-based.

“The selection of different coverage and features have to be predicated on the client’s objectives. There are so many ‘tools’ in retirement planning, but a tool is only useful to the extent that it meets the client’s specific needs, and a needs-assessment should always precede a product assessment.”

In the first half of 2018, FIA sales in the U.S. were 32.1 billion, 14% higher than the first half of 2017, according to the LIMRA Secure Retirement Institute. VA sales improved 2% to $25.8 billion in the second quarter, after 17 consecutive quarters of declines. VA sales were $50.4 billion in the first half of 2018, level with prior year results.

‘RIAs, You’ve Got to Try This’: Macchia

Posted on October 24, 2018 by Kerry Pechter -

From the Boston offices of his company, Wealth2K, income planning guru David Macchia has watched the annuity industry try, with limited success, to gain acceptance among registered investment advisors (RIAs).

The marketer of an income-planning tool based on hybrid time-segmentation (i.e., bucketing plus “flooring”), he wants to help, and he thinks he knows how. The secret, he says, is to establish empathy for the plight of the “constrained investor” and shift focus away from the annuity products themselves.

“My goal is to help the industry out of the box that it has put itself in for the past 40 years,” Macchia told RIJ in an interview this week. “The annuity industry, decade after decade, has struggled with under-appreciation and under-utilization by intermediaries—including fee-only advisors—as well as lack of penetration of consumers’ minds.

“Through my career, I’ve seen the industry trying to change advisors’ thinking about the annuity product. The Alliance for Lifetime Income’s ad campaign is the latest effort. But the industry will never succeed in changing how a Ken Fisher [the celebrity money manager who advertises his antipathy to annuities] thinks about annuities as products. Advisors like him will continue to reflexively disregard annuities.”

Change will come, Macchia believes, only if the industry can convince advisors to reassess their older clients not as investors with specific amounts of investable assets but as people who are either well-fixed for retirement, hopelessly unprepared, or somewhere in between.

“Rather than convince the advisors to think differently about annuities, the industry needs to convince advisors to think differently about the clients,” Macchia said.

“For fee-only advisors today, everything is about growing assets-under-management, or AUM. Advisors categorize clients into widely understood and accepted classes, such as mass affluent, high net worth, and ultra-high net worth. In that context, annuities appear to have no role at all.

“But if you shift your focus away from AUM to the clients’ ‘assets to income’ ratio, which is the ratio of a client’s accumulated assets to his or her need for income in retirement, then you have basis for a paradigm shift. What you discover is that clients are overfunded for retirement, underfunded, or ‘constrained.’ The constrained retirees are the important segment here.”

Macchia is referring to the “funded status” distinctions created long ago by retirement planning pioneer Jim Otar. “Overfunded” clients are those whose annual need for income (beyond Social Security) is 3.5% of their assets or less. No matter what retirement income generation strategy they follow, they’re not in danger of running out of money. Underfunded clients need 7% or more of their assets for income each year. Generally, advisors aren’t competing for their business.

Constrained investors have an income-to-assets ratio of 3.5% to 7%. Collectively, they hold trillions of dollars in savings, Macchia said.

“They reach retirement with substantial savings, but not a lot of assets relative to their income needs,” he told RIJ. “So they have little room for error. They typically can’t tolerate a lot of market risk, but they can’t afford not to be in equities. They need sources of guaranteed income that will let them stay invested during tough times.

Annuities give constrained investors psychological as well as financial benefits. They need risk mitigation strategies that address timing risk [the risk of a big loss near the retirement date] and longevity risk.”

“Constrained investor clients have to answer the question, ‘Do I want to leave my retirement security to chance?’ Because relying on luck is their only alternative to buying a guaranteed income product.”

Faced with today’s markets, with both stock and bond valuations at or near record highs, traditional investment-only advisors don’t have much to offer clients. But today’s markets represent a perfect opportunity for advisors adept in the strategic application of annuities.

“Today we’re sitting atop a 10-year bull market,” Macchia said. “You can’t go a day without reading headlines about a possible major correction. A recent article said that high valuations make this the worst possible time to retire. I say, This is the perfect time to retire if your advisor has provided the right strategy.”

An investment-only advisor might look at today’s financial landscape and see little opportunity for yield, and possess limited tools for easing investors’ anxieties. The annuity-literate advisor sees clients facing vast amounts of unaddressed timing risk and longevity risk. He can help mitigate those risks by recommending annuities, which can convert today’s vertiginous valuations into safe lifetime income. The result: grateful clients.

“The magic for solving the annuity dilemma is to understand the needs of constrained investors,” Macchia said. “The conversation has to move from products to risks.

“Here’s a thought experiment: You show my new video to 200 million adults. It says, ‘Tell your financial advisor that you want to be protected against longevity risk and timing risk!’ That would change advisors’ attitudes toward annuities. Then they’d start asking clients, ‘Do you want to leave your retirement security to luck?’”

Jackson National hires Michael Falcon as new CEO

Posted on October 19, 2018 by Editorial Staff -

Jackson National Life has announced that CEO Barry Stowe will retire on Dec. 31, 2018. Michael Falcon, who has been CEO of Asia Pacific for J.P. Morgan Asset Management since 2015, will succeed him. Falcon will step into his new role Jan. 7, 2019, pending regulatory approval.

Stowe has headed Prudential plc’s North American Business Unit, which includes Jackson and its affiliates, since 2015. He joined Prudential in 2006 as chief executive of Prudential Corporation Asia and has been on Prudential plc’s board and executive committee for 12 years.

Falcon joined J.P. Morgan Asset Management in New York as head of retirement in 2010, responsible for investment management and plan services businesses in the defined contribution, individual retirement and taxable savings market.

From 2000 to 2008, he worked at Merrill Lynch, serving as head of the Retirement Group and other roles, including head of Strategy and Finance for the US Private Client business. He later served as a consultant and strategic advisor to companies in the retirement, equity awards, wealth management and asset management industries until joining J.P. Morgan Asset Management in 2010.

Falcon has served as a trustee and executive committee member of the Employee Benefit Research Institute (EBRI) and was founding chairman of the Advisory Board of EBRI’s Center for Retirement Income Research. Falcon will divide his time between Nashville, Tennessee and Lansing, Michigan.

In other Jackson-related news, A.M. Best has removed from under review with developing implications and affirmed the Financial Strength Rating of A+ (Superior) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “aa-” of Jackson National Life Insurance Company (JNL), its wholly owned subsidiary, Jackson National Life Insurance Company of New York, and its direct parent, Brooke Life Insurance Company (collectively referred to as the Jackson National Group (JNG).

The ratings were placed under review in March 2018, following the public announcement by JNG’s parent, Prudential plc (Prudential) [NYSE: PUK], that it intends to demerge its U.K. and Europe business from Prudential, resulting in two separately traded companies.

“JNL’s market leading position in its core variable annuity (VA) line and its extensive and diverse distribution capabilities are the drivers behind the company’s favorable business profile. However, A.M. Best notes that JNG’s liability profile is less diversified than many of its peer companies, due to its concentration in the VA market,” an A.M. Best release said.

Honorable Mention

Posted on October 19, 2018 by Editorial Staff -

Prudential announces $3.2 billion in pension risk transfer deals

Prudential Retirement, a unit of Prudential Financial, Inc., has concluded $3.2 billion in previously undisclosed longevity reinsurance contracts, calling it “a further sign that pension de-risking activity in the U.K. is continuing at a brisk pace.”

As part of these transactions, The Prudential Insurance Company of America (PICA) assumes the longevity risk for approximately 13,200 retirees. The press release did not name the British pension sponsors involved.

The affordability of pension buy-ins and buy-outs is due in part to the improved funded status of U.K. schemes, which, on average, were at or near full funding in the summer of 2018. This improvement in funded status represents a marked increase over the last two years. This trend is driving the pension risk transfer business.

“The average U.K. pension scheme is at or near full funding, a material improvement over the last two years,” said Amy Kessler, head of longevity risk transfer at Prudential, in a release. “That is happening at the same time longevity improvements have slowed. Pensions are actively taking advantage of this environment by locking in these gains and transferring risk, knowing that such periods don’t last forever.”

These agreements follow at least 10 others during the last 12 months that are $1 billion or more in size, Prudential said.

Prudential has completed more than $50 billion in international reinsurance transactions since 2011, including a record $27.7 billion transaction involving the BT Pension Scheme.

New CEO at Thrivent: Terry Rasmussen

Thrivent announced this week that Brad Hewitt will retire as CEO and that Terry Rasmussen, president of Thrivent’s core fraternal business unit for the last three years, will succeed him.
Hewitt joined Thrivent in 2003 as chief fraternal officer. He was named COO in 2008 and CEO in 2010. He began his career with Securian in the Actuarial Services department. He held senior positions at UnitedHealth Group and Diversified Pharmaceutical Services.

Hewitt graduated from the University of Wisconsin-River Falls with a B.S. in mathematics. Rasmussen joined Thrivent in 2005. She was named president in 2015, after serving for 10 years as senior vice president, general counsel and secretary.

Before joining Thrivent, Rasmussen served in senior legal positions with American Express and Ameriprise Financial. At American Express she was responsible for global legal support of financial service products and services.

A former trial attorney in the U.S. Attorney General’s Honors Program, she received a BS in accounting from Minnesota State University-Moorhead and passed the CPA exam. She earned her JD from the University of North Dakota.

American Equity issues new FIA for retirement savers

American Equity Investment Life Insurance Company announced a new accumulation-oriented fixed index annuity product: AssetShield.

AssetShield “has a 175% participation rate on the S&P 500 Dividend Aristocrats with a two year point-to-point indexed strategy,” said Kirby Wood, Chief Distribution Officer of American Equity.

The AssetShield, with 5, 7, and 10 year terms available, offers multiple index crediting allocations – all backed by S&P indices, plus added access features for increased asset control.

Warnings about federal debt… but not about private debt

The Concord Coalition has warned that the rising federal budget deficit–totaling nearly $779 billion in Fiscal Year 2018–reflects a structural gap between spending and revenues that is largely ignored in Washington even as it grows worse.

The Treasury Department this afternoon released the figure, which is $113 billion higher than 2017 deficit, along with other data for Fiscal 2018, which ended Sept. 30.

“Rather than taking advantage of this strong economy to improve the fiscal picture, Washington over the past year has made the situation worse,” said Robert. L. Bixby, executive director of The Concord Coalition, in a release.

Federal receipts for Fiscal 2018 totaled $3.33 trillion while spending totaled $4.11 trillion. The comparable figures for the previous year were $3,315 billion in receipts and $3,981 billion in outlays.

Roughly three-quarters of the spending growth came from mandatory spending programs and interest on the debt, which grow automatically. Revenue was essentially flat despite solid economic growth.

“Neither Democrats nor Republicans think this choice-less fiscal policy can go on forever,” Bixby said.

The 2018 deficit added significantly to the total federal debt, which now stands at nearly $21.6 billion. The Congressional Budget Office has previously projected that under current laws the federal government will begin running $1 trillion annual deficits in 2020.

The government’s interest costs in 2018 totaled $325 billion, a figure that is projected to rise rapidly in the coming decade and is $62 billion more than was spent last year.

Congress and President Trump approved deficit-financed tax cuts last December and deficit-financed spending increases earlier this year. Treasury Secretary Steven Mnuchin said last week that increases in defense spending were “very, very important,” and pointed out that Democrats wanted additional domestic spending in return.

The Concord Coalition is a nonpartisan, grassroots organization dedicated to fiscal responsibility.

New digital MYGA platform from Blueprint Income

Posted on October 19, 2018 by Editorial Staff -

Blueprint Income, a New York-based fintech firm formerly known as Abaris, has what it calls the “first end-to-end fixed annuity platform for consumers.” Clients can use the platform “to search for, compare and then purchase simple, multi-year guaranteed annuities (MYGA) digitally in minutes,” a Blueprint Income release said.

Fixed annuities, which are backed by life insurers, are similar to bank-issued, federally insured certificates of deposit (CDs) but typically offer a five-year return that is “more than 40 basis points above the top CD rate as of October 1, 2018, according to data from Bankrate and the FDIC, the release said.

Blueprint Income has been working for several years to build a direct-to-consumer online marketplace for deferred and immediate income annuities. They describe their offering as a “free digital platform [where] it’s possible to understand, compare, and purchase simple fixed annuities, all without the pressure to buy.”

“Like the rest of personal finance and retirement, we’re seeing the Internet shift the balance of power towards the consumer in the annuity market,” said Matt Carey, co-founder and CEO of Blueprint Income, in a statement.

Although many insurers are investing in complex variable and indexed annuities, the market is heading towards “the simple products that use the tax-deferred annuity chassis to replace defined benefit pensions or compete with CDs,” said Lauren Minches, FSA, Blueprint Income’s vice president for product design, in the release.

“Valuations in the stock market, no matter how you measure it, are at all time highs. I’m not naive enough to call the top, but we’re seeing that many of those nearing retirement want to have at least a portion of their money earning a guarantee, whether that’s a guaranteed return or guaranteed income,” said Nimish Shukla, CFA and a Blueprint Income co-founder.

Blueprint Income distributes fixed annuity products for over 25 providers, including AIG, Lincoln Financial, MassMutual, and Pacific Life, as well as a number of B, B+ and B++ rated carriers, some of whose 10-year MYGA rates now exceed 4% per year. “Insurers plan to deepen some of those relationships with digital processing of annuity products and digital-only product offerings,” the release said.

Blueprint Income also offers a Personal Pension (a multi-premium deferred income annuity), income annuities, and now fixed annuities.

The Link Between Aging and Populism

Posted on October 19, 2018 by Edoardo Campanella -

The right-wing populism that has emerged in many Western democracies in recent years could turn out to be much more than a blip on the political landscape. Beyond the Great Recession and the migration crisis, both of which created fertile ground for populist parties, the aging of the West’s population will continue to alter political power dynamics in populists’ favor.

It turns out that older voters are rather sympathetic to nationalist movements. Older Britons voted disproportionately in favor of leaving the European Union, and older Americans delivered the US presidency to Donald Trump. Neither the Law and Justice (PiS) party in Poland nor Fidesz in Hungary would be in power without the enthusiastic support of the elderly. And in Italy, the League has succeeded in large part by exploiting the discontent of Northern Italy’s seniors. Among today’s populists, only Marine Le Pen of France’s National Rally (formerly the National Front) – and possibly Jair Bolsonaro in Brazil – relies on younger voters.

Next spring, this age-driven voting pattern could drive the outcome of the European Parliament election. According to recent studies, older Europeans – especially those with less education – are more suspicious of the European project and less trusting of the European Parliament than younger Europeans are. This is surprising, given that memories of World War II and its legacy should be fresher for older generations. Nevertheless, their skepticism toward democratic EU institutions may explain their receptiveness to authoritarian leaders.

Most likely, a growing sense of insecurity is pushing the elderly into the populists’ arms. Leaving aside country-specific peculiarities, nationalist parties all promise to stem global forces that will affect older people disproportionately.

For example, immigration tends to instill more fear in older voters, because they are usually more attached to traditional values and self-contained communities. Likewise, globalization and technological progress often disrupt traditional or legacy industries, where older workers are more likely to be employed. The rise of the digital economy, dominated by people in their twenties and thirties, is also pushing older workers to the margins. But, unlike in the past, crumbling pension systems can no longer absorb such labor-market shocks. The result is that older workers who lose their job are condemned to long-term unemployment.

Moreover, pensioners now have reason to worry about threats to their retirement benefits from their own children. Young people, frustrated with socioeconomic systems that are clearly tilted in favor of retirees, are increasingly calling for fairer intergenerational redistribution of scarce resources. For example, Italy’s Five Star Movement, which governs in a coalition with the League, recently called for a “citizen’s income” that would be available to all unemployed people regardless of age. So, while right-wing populists have attracted older voters, left-wing populist have gained a following among younger generations.

By backing right-wing populists, older voters hope to return to a time when domestic affairs were insulated from global forces and national borders were less porous. At the heart of today’s nationalist politics is a promise to preserve the status quo – or even to restore a mythical past.

Hence, nationalist politicians often resort to nostalgic rhetoric to mobilize their older supporters. For his part, Trump has pledged to bring back jobs in the American Rust Belt, once the center of US manufacturing. Likewise, there could be no clearer symbol of resistance to change than his proposed wall on the US-Mexico border. And his crackdown on illegal immigration and ban on travelers from predominantly Muslim countries signals his commitment to a “pure” American nation.

Similarly, in continental Europe, right-wing populists want to return to a time before the adoption of the euro and the Schengen system of passport-free travel within most of the EU. And they often appeal directly to older voters by promising to lower the retirement age and expand pension benefits (both are flagship policies of the League).

In the United Kingdom, the “Leave” campaign promised vindication for those who have been left behind in the age of globalization. Never mind that it also touted the idea of a free and independent “Global Britain.” The Brexiteers are not known for their consistency.

At any rate, to the extent that today’s populist wave is driven by demographics, it is not likely to crest anytime soon. In graying societies, the political clout of the elderly will steadily grow; and in rapidly changing economies, their ability to adapt will decline. As a result, older voters will demand more and more socioeconomic security, and irresponsible populists will be waiting in the wings to accommodate them.

Can anything be done? To stem the nationalist tide, mainstream parties urgently need to devise a new social compact that addresses the mounting sense of insecurity among older voters. They will need to strike a better balance between openness and protection, innovation and regulation; and they will need to do so without falling into a regressive populist trap.

The answer is not to suffocate global forces, but to render them more tolerable. Citizens of all ages need to be equipped to face current and future disruptions. In this sense, it is better to empower the elderly than simply to protect them. Most advanced economies simply cannot afford massive new benefits for an oversized interest group. And besides, a policy that makes people reliant on some form of external support is morally questionable, at best.

Instead, governments should focus on upgrading older workers’ skills, creating more opportunities for older and younger generations to work together, and holding disruptors accountable for the socioeconomic consequences they generate. Subsidies to the most vulnerable should remain a last resort.

In many ways, older voters’ infatuation with populists is a cry for help. It is up to enlightened politicians to respond to it constructively.

Edoardo Campanella is a Future of the World Fellow at the Center for the Governance of Change of IE University in Madrid.

Will Fee-Only Advisors Warm to Annuities?

Posted on October 19, 2018 by Kerry Pechter -

The trouble with fee-only advisors—from an annuity marketer’s viewpoint—is that they are master craftsmen. They dig annuities as much as Culinary Institute grads dig Swanson TV dinners. They do custom work. They’re fiduciaries. As a rule, they don’t buy packaged products.

When fee-only advisors attend annuity breakouts at conferences, they ask a lot of sharp-pencil questions. They’re keen to learn how actuarial magicians pull doves out of top hats. They’re sure they can do the same tricks at lower cost. In short, they’re a tough audience.

But annuity promoters, aware that fee-only advisors and registered investment advisors (RIAs) represent a big, untapped market, feel hopeful. Another reason for optimism: Some fee-only advisors now admit that it might be unfiduciary not to consider annuities in retirement planning.

So it was that Wade Pfau, Ph.D., head of the doctoral program in retirement income at American College of Financial Services, and David Lau, creator of the new DPL Financial no-commission annuity platform, could be found preaching annuities to sizable audiences of fee-only advisors at the National Association of Personal Financial Planners conference in Philadelphia this week.

The Pfau philosophy

Wade Pfau

Pfau, as he often does, presented the case that there’s no cheaper way for a retiree to deal with longevity risk—which he called the “overarching financial risk in retirement”—than to transfer that risk to a life insurance company by buying some form of life-contingent annuity.

Indeed, it’s almost QED that, if you’re training to live to 100 by eating kale, drinking turmeric chai, taking Pilates classes and wintering in Arizona, it’s almost a no-brainer to let an insurance company pay you an income based on the assumption that you’ll only live to age 85 (the approximate average life expectancy for 65-year-olds).

Pfau’s claim to fame, in addition to having had Alan Blinder as a thesis advisor at Princeton, is that he has crunched the numbers on the “alpha” of life-contingent annuities so thoroughly over the past decade that even a Ken Fisher would be hard-pressed to refute them.

Although there is no orthodoxy when it comes to retirement income planning, Pfau explained that there are three main schools of thought. There is the time-segmentation method (whose merits are largely behavioral). There is also the Bengen safe withdrawal method (which lacks the certainty that retirees like).

Finally, there’s the build-a-floor-and-go-for-upside method: Retirees should cover all their essential expenses with sources of income that are guaranteed for life (Social Security, pensions and annuities). They should divide the rest of their money between growth-oriented assets (for discretionary expenses or inflation-protection) and short-term reserves for emergencies.

This approach is goal-based, and the goals will vary by client. See Pfau’s presentation slide below. He’s close to finishing a new book on the synergies between annuities and investments in retirement.

DPL Financial Partners

In the other annuity-based presentation in Philadelphia this week, serial insurance entrepreneur David Lau (who co-created Jefferson National’s low-cost investment-only variable annuity business for RIAs and sold it to Nationwide) gave a talk about indexed and variable annuities with lifetime income riders and, to a lesser degree, about income annuities.

Lau has created an Internet platform, DPL Financial, where RIAs and fee-only planners without insurance licenses can buy no-commission annuities from a variety of insurers, including Allianz, TIAA, Great American, AXA, Great-West Financial, Integrity, Security Benefit, and Colorado Bankers Life.

No-commission FIAs tend to have higher caps.

Only indirectly promoting his platform, Lau made the case for deferred annuities with lifetime income benefit riders. These products are hard to explain. It’s not the underlying assets that are hard to explain: Indexed annuities are merely a cake of bonds or bond ladders with an icing of options on an equity index such as, most commonly, the S&P 500 Index.

David Lau

No, what’s hard to explain is the income option. The income options on indexed annuities have drawn interest lately because they promise high annual payouts, relative to deferred income annuities (DIAs) or income options in variable annuities (VA), for retirees who buy their contracts ten years before they intend to take a monthly income from their accounts.

Part of the opacity stems from the fact that there are two layers of options in an indexed annuity with an income rider. There are the equity options in the underlying asset pool. Then there is the put option, which typically costs about 1% per year. When exercised, this allows the owner to convert an actuarially notional sum—the “benefit base”—to a stream of income that cannot be outlived. (The annual income is typically restricted to 5% or 6% of the benefit base.)

Under what circumstances might the owner exercise the income option? You would ordinarily do it if the market has done badly and the actual account value (liquid, accessible) is significantly lower than the benefit base. But the option doesn’t give you direct access to the benefit base—it only gives you access to a guaranteed income equal to a percentage of the benefit base. The client still has access to the money in the account, although taking ad-lib withdrawals will reduce the annual income.

After the presentation, an advisor from Rye, NY, turned and said, “I think I’m starting to understand it.” It all depends on whether the client, after six, seven or 10 years, exercises the option and takes the annual income.

There’s the rub. The promised payouts on the product are high in part because quite a few contract owners pay for the option and never use it. Ergo, don’t use this product unless you know you’ll exercise the option, or unless you use the option for protection only during the 5-10 retirement “red zone” years. If the market doesn’t crash during that time, you can stop paying for the option.

How does DPL get paid for providing its annuity platform? “RIAs pay a membership fee to join DPL. That’s an expense for the firm essentially hiring us as an outside expert,” said Heather Rosato, DPL Financial’s chief marketing officer. “The carriers pay us an administration fee for the infrastructure we provide to distribute their products to RIAs (product education, licensing capabilities, broker-dealer, etc. That fee is baked into the product cost. Carriers can eliminate not only the commission but also their wholesaling and marketing costs. Our fee replaces those distribution costs and is 80-90% lower.”

The new no-commission platforms mentioned above may not be an entirely new phenomenon. In the exhibition area of the conference, one of the booths was sponsored by LLiS. It bills itself as “The advisor’s insurance advisor.” The person manning the booth assured me that LLiS, whose CEO is Mark Maurer, has been offering commission-less annuities and other insurance products to RIAs and fee-only advisors for years. It seems that LLiS now has more competition.

Compensation dilemma

Some fee-only advisors are, not surprisingly, a bit confused about how to get paid for recommending a no-commission annuity to a client. In sidebar discussions at the conference, some of them confessed they would not feel right in buying, for instance, a no-commission annuity for a client and then charging the client a 1% management fee for the money in the annuity.

At the same time, some feel that it wouldn’t be ethical to deny their older clients the demonstrable insurance benefits of annuities just because such products don’t fit their business model. It’s a dilemma.

Flight from active to passive funds and ETFs slowed in September: Morningstar

Posted on October 19, 2018 by Editorial Staff -

Investors placed $19.4 billion into passive U.S. equity funds in September, compared with inflows of $13.0 billion in the previous month, according to Morningstar’s latest flow report on U.S. mutual funds and exchange-traded funds (ETF).

On the active front, investors pulled $8.8 billion, compared with $14.4 billion of outflows as reported last month. Morningstar’s report about U.S. asset flows for September 2018 is available here.

Highlights from the report include:

Estimated long-term flows were $28.2 billion as U.S. equity funds rebounded with $10.6 billion of inflows and taxable bond funds led all groups with $20.9 billion, while international equity demand remained light with approximately $850 million.
Morningstar’s large blend, intermediate-term bond, and ultrashort bond categories continue as the most popular categories among bonds, with inflows of $9.1 billion, $6.1 billion, and $5.3 billion, respectively. Allocation—30% to 50% Equity was the least popular category, with outflows of $2.4 billion in September.
Vanguard had the highest monthly firm inflows of $16.5 billion among top U.S. fund families, while State Street Global Advisors saw the second highest firm inflows of $10.4 billion.
Among all U.S. open-end mutual funds and ETFs, Fidelity Advisor Growth & Income saw the most inflows of all active strategies at $1.8 billion, the fund’s highest inflows in a decade.
Fund families that saw the greatest outflows included Harbor, which had approximately $3.5 billion of outflows in September. Harbor International, an active fund with a Morningstar Analyst Rating of Bronze, was responsible for majority of those outflows at $3.4 billion.
Franklin Templeton had the second-highest outflows at $2.7 billion with T. Rowe Price and AQR following with outflows of $1.9 and $1.1 billion, respectively.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

Two firms position themselves for the ‘open MEP’ market

Posted on October 19, 2018 by Editorial Staff -

Two firms that have been active in the emerging area of provider-sponsored multiple employer retirement plans–a market that could explode if Congress passes the pending Family Savings Act of 2018–announced a new partnership this week.

TAG Resources has appointed Mesirow Financial to act as the 3(38) investment fiduciary on the TAG 401(k) Aggregated Solution, according to a release. Together, they will offer employers of all sizes “end to end” retirement plan fiduciary oversight.

TAG Resources will serve as the plan administrator and named fiduciary, as defined under ERISA sections 402(a), 3(16), and 3(21), with Mesirow Financial serving as the 3(38) investment manager.

A 3(38) Investment Manager is responsible for the investment selection, monitoring, and ongoing due diligence of the funds in the investment menu in accordance with the Investment Policy Statement for the plan.

The 401(k) Aggregated Solution offers outsourced retirement plan administration. Because the program is built on an “aggregated” model, smaller companies gain the advantages of an institutional service model which would otherwise not be available to them. Benefits include ease to the administrator, minimal fiduciary liability, partnerships with well-known providers, regulated compliance, and competitive cost.

Mesirow Financial specializes in investment, risk management and advisory services. Advisory services are offered through Mesirow Financial Investment Management, Inc., an SEC-registered investment advisor. To learn more, please visit mesirowfinancial.com.

TAG Resources, LLC, headquartered in Knoxville, TN, is a pioneer in the area of Multiple Employer Plans (MEPs), including creating and trademarking “The Open MEP.”

Three Questions to Ask Clients

Posted on October 19, 2018 by No Author -

BlackRock’s income fund

Ameriprise ‘adaptive withdrawal’

T. Rowe Price: Enough balance sheet?

James Comey: ‘You have to interrupt him’

Arthur Laffer, the supply-sider, dabbles in financial wellness

BBVA launches robo-advice tool on BNY Mellon Pershing platform

Migration to bonds finally reverses: TrimTabs

“Closed” MEPs: Bona Fide Employer Groups or Associations

Bona Fide PEOs

Outlier advantage

Lapse-dependent payouts

Prudential announces $3.2 billion in pension risk transfer deals

New CEO at Thrivent: Terry Rasmussen

American Equity issues new FIA for retirement savers

Warnings about federal debt… but not about private debt

The Pfau philosophy

DPL Financial Partners

Compensation dilemma

Data Connection

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