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Guess What: America Is Rich

Posted on October 5, 2018 by -

Do you still wonder where the Federal Reserve found the trillions of dollars it needed to bail out the banking industry back in 2008? Or how the nation could be “broke” but afford a massive corporate tax cut? Or how Uncle Sam could carry a $20-plus trillion national debt and still enjoy low borrowing costs?

Ten years after the financial crisis, a surprising number of people continue to brood over these questions. Seeking answers, about 400 of them gathered last weekend at the New School of Social Research in lower Manhattan for the Second International Conference of Modern Monetary Theory (MMT).

You may have heard MMT (if you’ve heard of it at all) described as a “heterodox” school of financial thought, one embraced by utopians, social activists, and economists at universities that are not the Ivy League, Stanford or the University of Chicago. Judging by the people that the conference attracted, it’s moving closer to the mainstream.

Speakers and audience members included academics from Harvard and Cornell, ex-bankers and bond traders, a harp manufacturer from Indiana, a state senator from Minnesota, and former Treasury officials. A few people came from as far as Canada, Spain, Italy and Australia, because MMT is a version of macroeconomics that applies to any country with a sovereign currency. One person, evidently a student, was wearing a black “Deficit Owl” t-shirt. MMTers sometimes call themselves deficit owls to distinguish themselves from deficit “hawks.”

Maybe because some its advocates aren’t shy about calling for a reduction in Wall Street’s power over credit creation (and over elected officials), MMT is inherently linked to an agenda of significant social change. It attracts members of advocacy groups like RealProgressivesUSA, ImHoppingMad.com, and the American Monetary Institute filled the New School auditorium. MMT offers a theoretical path to one of their most pressing goals: The creation of guaranteed (not “make-work”) government-paid jobs, with health insurance, and the end of involuntary unemployment.

The financial media, always trying to ‘follow the money,’ have taken more notice of MMT in recent years. A sympathetic journalist from Bloomberg News, and even one from buttoned-down Barron’s, served as moderators of panel discussions. Reporters from liberal (The New Yorker) and conservative (Breitbart News) outlets filtered in. It was not hard for the journalists to find people who wanted to talk to them. During breaks, coffee, bagels, muffins and Danish pastries were served and conversations spilled out onto W. 12th St., in the heart of the West Village. (On Friday night, conference-goers crowded into a neighborhood tavern appropriately called Shades of Green.)

Although its name implies that MMT is a theory, the movement’s creators (credit for conceiving MMT usually goes to Randall Wray, Warren Mosler and Bill Mitchell) consider it an accurate description of our financial system. For a number of reasons, however, the gist of MMT isn’t easy to convey. (Here’s an MMT blog.)

Joe Weisenthal, a conference panelist (and host of Bloomberg TV’s “What’d You Miss?”) likes to say that, in MMT’s view, the US dollar is analogous to frequent flier miles. An airline can issue as many bonus miles as it wants. Its only constraint is its supply of seats, flights, and airplanes. It can use techniques like putting expiration dates on bonus miles or raising the prices (in miles) of seats to maintain a desirable balance between supply and demand.

The US government, according to MMT, finances itself is a similar way. Using the alchemy of the Federal Reserve and the banking system, it can create as many dollars as people need. Unlike a household, or even like a state government, it isn’t credit-constrained. It is limited only by the supply of things that can be purchased in dollars (not just in the US but wherever dollars are accepted). It taxes dollars out of existence not to fund its expenditures, but to control inflation. That, at least, is my understanding of it.

MMT economist Stephanie Kelton on Bloomberg TV.

Here’s where I think many people run into conceptual trouble with MMT. We ordinarily assume that we “make” money by working or investing, and that the Internal Revenue Service (as some argue) “confiscates” taxes from us. MMT turns that view upside down, saying that the government spends dollars into the economy and taxes dollars out of it. In the MMT universe, Margaret Thatcher was wrong when she said that socialism doesn’t work because “eventually you run out of other people’s money;” the US and UK governments, by definition, have their own money.

This concept of creating and destroying money doesn’t make sense as long as you still think of “money” as a tangible item with intrinsic value, like those “Walking Liberty” silver dollars that an uncle gave me for my 13th birthday. Like matter, it may seem, real money can neither be created nor destroyed. That may been true for certain kinds of money at certain times, but it’s not true for the money we use now.

Today we use credit-money. A commercial bank creates deposits out of thin air by making a loan, and when the loan is repaid that money vanishes again. Through an analogous feat of double-entry accounting, according to MMT, the government can create money for its own account at the New York Fed without taking money from anyone else. The budget deficit simply measures how much more the government spends into the economy than it takes out in a year. The national debt represents the world’s savings in dollars and will never have to be repaid, merely serviced.

Some readers may be getting a bit uncomfortable at this point in the story. Mainstream economists tend to bridle at the mention of MMT, whose proponents dismiss macroeconomic orthodoxy regarding unemployment and inflation or government crowding-out of private investment. But a growing number of insiders have accepted its validity, even saying that they “knew it all along.” (Alan Greenspan, for one, acknowledged the validity of its central premise in this video.) Stephanie Kelton, an MMT economist at Stonybrook University on Long Island, travels extensively, speaking about MMT at financial conferences (e.g., Morningstar’s Investor Conference) and on television. She’s been an economics advisor to the Democratic side of the Senate Finance Committee and has advised Bernie Sanders.

Most of those who attended the conference at the New School last week seemed to find MMT to be liberating and empowering, and understandably so.  It tells them that the US can afford to spend much more on social insurance, schools, infrastructure, environmental repair and clean energy than it does today. If dollars are not a scarce commodity, then almost anything seems possible. Politicians may or may not cooperate (given our ethnic and rural/urban divides), but lack of money per se needn’t be a deal-breaker.

© 2018 RIJ Publishing LLC. All rights reserved.

Fed increases benchmark interest rate to between 2% and 2.25%

Posted on September 27, 2018 by -

The Federal Reserve’s chairman, Jerome H. Powell, said on Wednesday that the American economy was experiencing Citing the current economic environment “a particularly bright moment” for the US economy, Fed chairman Jerome H. Powell announced this week that it would raise its benchmark interest rate and anticipates future increases.

The decision to raise rates to a range between 2% and 2.25% was not intended to stifle growth, Powell said, according to the New York Times. President Trump told the media that the increase reflects a strong economy but that he is “not happy” with higher rates because they increase the country’s borrowing costs.

The Fed’s decision, announced after a two-day meeting of its Federal Open Market Committee, which sets monetary policy, represents the eighth time that the Fed has raised interest rates since the 2008 financial crisis, and the third time this year. Another increase is expected in December.

The Fed described economic conditions as “strong.” It predicted that growth this year could top 3%, before slowing in coming years. Unemployment remains low, inflation remains around the 2% pace the Fed regards as optimal, and the pace of investment has increased, it said.

The Fed did not describe its monetary policy as “accommodative,” but Powell said that monetary policy remained accommodative at the moment.

© 2018 RIJ Publishing LLC. All rights reserved.

Regulation, Kavanaugh, Trump & the Indexing of Capital Gains

Posted on September 27, 2018 by -

The issue of government regulation promulgated by unelected officials is central to many of today’s political and policy debates. It has surfaced in the confirmation battle over Supreme Court nominee Brett Kavanaugh, a strong critic of regulatory actions that are unsupported by legislative or constitutional authority. And we see it in the Trump administration’s contradictory regulatory initiatives: Aggressive deregulation when it comes to environmental law paired with enthusiastic administrative efforts to reduce taxes on capital—absent clear legislative authority.
While the nation’s regulatory wave crested four decades ago, long before President Trump, the pattern has always been inconsistent. President Jimmy Carter jump-started  the modern deregulatory push by cutting red tape for everything from airlines to home-brewed beer. Every president since has laid claim to at least part of the antiregulatory mantle. Yet, every recent president, including Trump, has also attempted to achieve policy goals through administrative power.
The current administration has been especially enthusiastic about using regulations to achieve tax policy ends. Senior White House advisers have asserted that Treasury and IRS can issue regulations to provide for the indexing of capital gains. The president himself has asked Treasury to liberalize the treatment of required distributions from retirement plans. Both share a common goal: to cut taxes on returns to wealthholders without enacting a statute.
In truth, presidents and political parties favor regulation mainly when it when it advances their own agenda, regardless of the number of pages it adds to the Federal Register. Interestingly, both presidents Trump and Obama have turned to administrative and regulatory initiatives in frustration when they felt they could not achieve their policy goals with Congress. And, when it comes to the sausage they do seek and get from Congress, their anti-regulatory fervor falls by the wayside; witness all the regulation that IRS still struggles to issue around the Tax Cut and Jobs Act of 2017.
But what are the criteria by which an affirmative decision to regulate should be made? In theory, they are two-fold: benefits should exceed costs and the actions should be constitutionally and legislatively allowed.
Using regulation to interpret the law can simplify life for taxpayers by providing rules surrounding the large number of possible transactions and arrangements into which they may enter. Such a requirement is often implicitly, if not explicitly, allowed by the legislation itself. While the law may not pass the benefit-cost test, regulations to taxpayers on how to be law-abiding usually does. Though the line between interpretation and exercising authority ceded in legislation is never perfectly clean, the Treasury and IRS have always viewed their guidance as mainly interpretative.
Yet, most administrations, not just the current one, often are tempted to wade into technical tax issues about which they have limited knowledge. A strong Treasury Secretary or Assistant Secretary can constrain such efforts, sometimes by making clear that meddling is unnecessary and potentially politically dangerous.
Extending to administrative agencies non-interpretative, legislative-type authority raises more complicated benefit-cost and statutory authority questions.
The Constitution explicitly requires that the President, not the Congress, “take care that the laws be faithfully executed.” Even if it didn’t, Congress has neither the time nor the expertise to execute laws, and implementation inevitably requires discretion. Anyone who has ever sat at a congressional drafting session knows how much Congress leaves unspecified in legislative language. Long before a tax bill becomes law, congressional staff have begun consulting with Treasury and other agencies over how to fill in the inevitable gaps in the statute.
Bottom line: Think twice before generalizing about the costs or benefits of regulation or even its constitutional basis. And remember that the political and ideological arguments for or against regulation, particularly as something good or bad in and of itself, tend to be selective and supported by weak legal and economic reasoning. Mostly, though, remember that the best way to avoid bad regulation or rule making is to avoid bad law making.

© 2018 Urban Institute.

Ten most popular ‘former’ 401(k) providers

Posted on September 27, 2018 by -

More first-wave boomers and Gen-Xers have chosen to keep their retirement assets in a former employer’s plan for at least five years, according to a new Cogent Report. “That’s welcome news for plan providers looking to keep assets in-house,” a Cogent release said this week.

“But with a significant decrease in overall satisfaction among former plan participants this year, plan providers must take heed that investment performance is not the only factor that retains client assets,” according to the release that accompanied DC Participant Planscape, an annual Cogent Reports study by Market Strategies International-Morpace.

Nearly half (46%) of former plan participants did not take any action with regard to rollover options in 2017 and 43% intend to leave their assets in-plan this year. Participants report staying in-plan because they are content with the investment performance and choice of investment options and have no intention of moving their assets unless absolutely necessary.

According to the report, the firms earning the highest level of former participant satisfaction, and thus those best positioned to retain assets in-plan, are:

  1. Vanguard
  2. Fidelity Investments
  3. Voya
  4. Charles Schwab
  5. TIAA
  6. T. Rowe Price
  7. Merrill Lynch/Merrill Edge
  8. Prudential Retirement
  9. Nationwide
  10. MassMutual
    (Source: Market Strategies International. Cogent Reports. DC Participant Planscape. July 2018.)

“The secret to success for plan providers is to find the right balance between maintaining high satisfaction with former participants who decide to leave their assets in the plan while at the same time being ready to cross-sell with rollover IRAs and other investment services,”s said Linda York, senior vice president at Market Strategies-Morpace, in a release.

Cogent Reports conducted an online survey of a representative cross section of 4,986 DC plan participants from April 30 to May 18, 2018. Survey participants were required to be 18 years or older, and contribute at least 1% to a current plan and/or have $5,000 or more in at least one former plan.

© 2018 RIJ Publishing LLC. All rights reserved.

On the Case: Plan for A Couple with $750K

Posted on September 27, 2018 by -

Every retirement income plan has to start somewhere, and Jerry Golden begins by asking clients to use his online widget to calculate their “Income Power.” That’s the level of guaranteed monthly lifetime income they could squeeze out of their savings if they used all of it to buy a ladder of commercial deferred income annuities.

Jerry Golden

“The starting point is ‘Income Power,’” Golden, the CEO of Manhattan-based Golden Retirement, told RIJ in a recent interview. Income Power can be calculated for a single investor, a couple, or even include a beneficiary. If the clients think they can retire on that income, plus Social Security and pensions (if any), then Golden starts building a more specific retirement income plan for them. The Income Power number is a benchmark, not an plan.

For this latest installment of our series of retirement income Case Studies, RIJ asked Golden to use his proprietary income planning process to create an income plan for a real but anonymous mass-affluent married couple, whom we’ll call the M.T. Knestors. The husband is 66 years old. He intends to claim Social Security in four years and then work part-time. Mrs. Knestor is 60 years old and already retired. They have two grown, self-supporting children.

The M.T. Knestors

Here is the client data (shorn of specific asset allocations or products) that we sent to Golden Retirement:

Based on their $755,000 in assets, this couple’s Income Power is $2,900 per month at the start of the husband’s retirement, according to Golden’s software. With inflation adjustments, it rises to $4,900 after 15 years, when Mr. Knestor reaches age 85. But if this number isn’t part of the income plan, as noted above, why is it so important?

If deemed acceptable by the client, the Income Power number tells Golden if his clients have roughly enough savings not only to cover their monthly expenses in retirement, but also to offset inflation risk and longevity risk. If the couple considered their Income Power number too small to meet their expected retirement expenses, Golden would advise them to save more, retire later, reduce expenses, work part-time in retirement, or leverage their home by downsizing or borrowing against it.

Unless the Income Power number is high enough, creating a satisfactory plan would likely be a challenge. That’s why it’s important.

Jerry’s ground rules

After clients accept their Income Power as a good starting point, Golden can submit their specifics to his process. While every plan undergoes multiple changes during implementation, and each client will choose different sets of products, Golden’s general principles for creating a retirement income plan are:

Keep at least 65% of the portfolio in liquid investments. Golden believes that, as a general rule, no more than 30% to 35% of the assets should be annuitized. The client should think of the annuity purchase as part of the allocation to fixed income.

Purchase a qualified longevity annuity contract (QLAC). As a general rule, Golden recommends using 25% of each spouse’s tax-deferred savings (up to $130,000 each) to buy a deferred income annuity that begins no later than age 85. The QLAC provides late-in-retirement income to cover basic expenses plus supplement late-life health care costs if needed.

Invest remaining tax-deferred assets in a balanced portfolio. Golden recommends a systematic withdrawal program, based on conservative growth assumptions, that will exhaust the qualified assets between the date of retirement and the date when the QLAC income begins. (Favorable performance can either increase or extend withdrawals. See below.) He doesn’t believe in limiting withdrawals to the minimum required amount. The typical mass-affluent retiree, unlike high-net-worth retirees, needs the income and is less concerned with the tax consequences, Golden told RIJ.

Increase withdrawals according to market returns. The clients can increase their income by 1%, 2%, or 3% per year, depending on whether equity returns are 4%, 6%, or 8%, respectively.

Invest taxable assets in dividend-paying stocks. The logic here is to draw down dividends as a supplement to monthly income while preserving the stocks for late-life expenses or bequests. These investments will potentially be eligible for the step-up in basis at death, and the capital gains tax relief that comes with it. To reduce risk, Golden recommends investing part of this allocation in high quality corporate bonds.

Buy an immediate income annuity if necessary. If the dividends, systematic withdrawals and QLAC income don’t produce adequate monthly income, Golden says, the client should consider using part of the savings to buy an immediate life annuity to make up the difference. When advising clients, he calls the immediate life annuity the plan’s “belt” and the QLAC its “suspenders.”

“Income allocation” is more important than “asset allocation.” Golden sees the client’s portfolio through the prism of income. He expects to allocate 25% to 40% of the client’s assets to the purchase of annuities, with the rest of the assets producing systematic withdrawals (from qualified accounts) and interest and dividends (from after-tax accounts).

The Knestors’ income plan

Based on these principles, the first draft of Golden’s plan (it may be amended and re-amended during future meetings) for the couple appears below. He used $132,500 (the sum of 25% of each spouse’s IRA savings) to buy a QLAC that would provide income when each reaches age 85. (The clients can adjust the start dates as they deem appropriate.)

Golden recommended putting the remaining pre-tax savings of about $400,000 in a 50% stocks/50% bond portfolio to provide systematic withdrawal income for 15 years, until the QLAC income starts. For additional monthly income over the entire retirement period, he put about $170,000 of the after-tax savings and put it into dividend-bearing stocks. He allocated the remaining $56,000 in after-tax savings to a small immediate, joint-life, inflation-adjusted income annuity. (In subsequent meetings, the couple could shift money from the high-dividend stocks to the immediate annuity, if they wanted more current income.)

Here’s the income chart that resulted from the allocations above:

 

This plan keeps most (75%) of the couple’s savings in liquid form (which will help them meet their goal to leave money to their children), while ensuring that more than half of their monthly income (including Social Security) is inflation-adjusted and guaranteed for life. The QLAC also acts a buffer against medical expense risk in late life. Overall, the plan delivers both upside potential and downside protection.

Perhaps because he has an insurance background, Golden is risk-conscious and doesn’t believe in the usual steps that many investment advisors take when creating an income plan, such as prescribing a systematic withdrawal plan based on the 4% rule solely against a portfolio of securities.

“Our fundamental approach is that asset allocation is all wrong for retirement income planning,” Golden told RIJ. He believes that Monte Carlo simulations, such as those that predict a 90% chance that a portfolio will last to age 90, are often based on market returns that most clients won’t experience because they sell stocks during a slump. “The biggest risk is persistency risk,” he said. “It’s wrong to assume that the client will be in the market every day between now and age 90. That’s just flawed.”

Scaling up the business

Golden finds new retail clients through his luncheon seminars, which he fills by sending email invitations to lists of executives in the New York-New Jersey-Connecticut area. His website and his blogposts also attract new clients, many of whom are already amenable to guaranteed income products and some of whom have already used his widget to calculate their Income Power. He also does targeted advertising in Kiplinger.com, where his articles are published in the Wealth Management section.

“We talk about minimizing risk,” Golden said. “Our income headline is ‘More Income, Less Market Risk, that’s what we want them to hear. The income annuity is just a tool. If we said we were going to create a 30% annuity plan, we’d lose people. When all is said and done, we look at the allocation and we see if we can meet the income goal by staying 65% liquid.”

Few people can match Golden’s level of expertise in the retirement income field. Over a 40-year insurance career, he’s been an actuary, home office executive, product developer, advisor and serial entrepreneur. At AXA-Equitable (now AXA US), he developed the first guaranteed minimum income benefit (GMIB) rider on a variable annuity. For MassMutual, he invented an income generation tool for advisors and retirees called the Retirement Management Account, or RMA.

Now, as a kind of capstone project, Golden is trying to scale up Golden Retirement and its Income Power methodology, which combines algorithms with human advice. So far he’s been bootstrapping his own web and software efforts. Eventually he’ll decide either to grow organically, license his technology to advisors, look for venture capital, or sell his mousetrap to a big financial services company.

“We know that we can drive interest and find high value prospects,” Golden said. “But then do we keep the clients ourselves and build up our own call center? Or do we send leads to third-party advisors? Or do we license our technology to various advisor platforms, or to larger institutions? We’re going through that decision-making process right now.” The opportunity for advisors to do well and do good by helping Boomers turn savings into sustainable income is, in his view, virtually unlimited.

© 2018 RIJ Publishing LLC. All rights reserved.

 

 

Transparency, low-cost will guarantee a market for clean-shares: Cerulli

Posted on September 27, 2018 by -

The September 2018 issue of The Cerulli Edge—U.S. Monthly Product Trends Edition analyzes mutual fund and exchange-traded fund (ETF) product trends as of August 2018. This issue also provides special coverage on share class trends, including the future of clean shares, the effects of fee compression, and asset managers’ priorities.

Highlights from this research:

  • Despite the death of the Department of Labor Conflict of Interest Rule and lack of clarity around the inclusion of sub-transfer agent (sub-TA) fees, clean-share mutual funds will likely have a place in the intermediary market due to greater fee transparency and lower cost. Asset managers will need to work hand-in-hand with their distribution partners to rework the payment flow of certain asset-based fees (e.g., 12b-1 fees, sub-TA fees) that will no longer be included in clean shares.
  • August was another successful month for passive mutual funds and ETFs, as these strategies collectively witnessed assets increase 2.2% to just less than $7.3 trillion. However, total mutual fund assets only grew 0.9% in August, finishing the month with approximately $15.4 billion. ETF asset growth topped 2.0% again in August, reaching nearly $3.7 billion. Flows were an impressive $24.9 billion.
  • A key trend emerging within the industry is managers trying to find a way to deliver institutional pricing levels to retail investors. This sentiment is reflected in a recent Cerulli survey revealing that 55% of managers currently place a high priority on fee modification, a significant uptick from 41% of managers prioritizing this in 2017. Despite the general desire for modification, significant roadblocks have stood in the way of tangible innovation, with managers instead opting to continue reducing expense ratios rather than develop entirely new solutions.

© 2018 Cerulli Associates.

Enjoy Today’s Income Plan

Posted on September 27, 2018 by -

In this week’s issue of RIJ, we present the first draft of a retirement income plan created by Jerry Golden of Golden Retirement for an anonymous couple with about $750,000 in savings. We think that you’ll find it interesting.

Many RIJ readers may recognize Golden’s name. (What last name could possibly be more appropriate for a retirement expert?) As an actuary, advisor, executive, and entrepreneur, he’s been a seminal figure in the retirement industry.

Some two decades ago, at AXA-Equitable, he developed the first guaranteed minimum income benefit—an option to convert a variable annuity to an income annuity with a guaranteed floor. A decade ago, he created the Retirement Management Account, a process for the gradual conversion of liquid assets to income annuities, and sold it to MassMutual.

The plan that Golden presents here, while still in the rough-cut stage of development, reflects his core beliefs about income planning. For instance, he likes qualified longevity annuity contracts, or QLACs. These are the deferred income annuities, purchased with qualified savings, whose value (up to 25% of qualified savings or $130,000 per person) can be excluded from the calculation of required minimum distributions until as late as age 85.

Aside from offering modest tax benefits, he says, QLACs provide future income, at a steeply discounted price, that can be applied, if needed, to assisted living or long-term care expenses. Golden acknowledges that QLACs aren’t popular with most advisors. That’s because most advisors focus on selling products, he says, and QLACs “are part of a planning sale, not a product sale.”

Golden believes in “income allocation,” not “asset allocation.” The plan we present today is also noteworthy for its diversification of income sources. During the middle years of retirement, the plan produces monthly income from immediate annuities, through systematic withdrawals from a total return portfolio, and from dividend-paying stocks. During the later years, QLAC income joins the mix.

As a general rule, he recommends annuitizing between 20% and 40% of savings and keeping the rest liquid. His system is quite distinct from “safe withdrawal rate” methods, from “bucketing,” and from “floor-and-upside” techniques. As you read his plan, note that none of the clients’ money is allocated to money market accounts and none is set aside for appreciation only. All of the allocations produce either current or future income.

Golden Retirement provides direct advice to clients, using a proprietary process. Golden meets prospects through luncheon seminars and through his website. He publicizes his business through ads and articles in Kiplinger’s magazine. He foresees a point where he won’t personally be able to handle the volume of incoming business. He’s already considering licensing his process to other advisors or to sell it to an institution. Even after some 40 years in the retirement industry, he still thinks like an entrepreneur.

We hope you enjoy Golden’s solution for the “M.T. Knestors.” You can expect more case studies like this one in future editions of RIJ.

© 2018 RIJ Publishing LLC. All rights reserved.

People who think annuities are ‘fair’ are more likely to buy one

Posted on September 27, 2018 by -

A study by retirement researchers at UCLA and Duke found that older Americans who perceive annuities to be “fair” are the ones most likely to buy them. At the same time, they discovered that about one in five Americans ages 40 to 65 can be described as an “annuity hater.”

“By far the strongest of all the individual differences we measured at predicting liking of annuities is the question of whether the individuals think annuities are ‘fair,’ wrote Suzanne Shu and Robert Zeithammer of UCLA and John Payne of Duke, three long-time contributors to research on the so-called “annuity puzzle.”

“From a positive perspective for marketers of these products… this suggests that the annuity puzzle [i.e., the low demand for longevity insurance among retirees] is more a problem of perception that of the financial tradeoffs inherent in the product,” they wrote.

Their paper, “The Pivotal Role of Fairness: Which Consumers Like Annuities?” (NBER Working Paper 25067), also suggested that note their research conclusions might be useful “for financial planners hoping to help their customers with [their] decumulation challenges.”

To determine perceptions of fairness, the authors first asked several hundred Americans ages 40 to 65 if they considered annuities “Completely unfair,” “Acceptable” or “Somewhat Unfair.” Then they asked them to indicate if they agreed or not with the following statements.

  • I feel like I understand the life annuity market well.
  • The system behind life annuities should be changed.
  • I would avoid companies that sell life annuities if I could.
  • It is clear where the money for this product comes from.
  • It is fair that the company is allowed to keep the excess funds.
  • I feel that I would have too little control over my retirement money if I bought an annuity.

“Prior research on consumer fairness has suggested that judgments of fairness are affected by the way that profits are shared between the firm and consumer, the intentions of the firm, the firm’s perceived wealth and power, and whether underlying costs are variable or fixed. In this project, our fairness measure was a simple one taken directly from Kahneman, Knetsch, and Thaler (1986),” the paper said.

The survey turned up two findings that diverged from past research. In this study, unlike some others, acceptance of annuities was found to be higher among people who were relatively less loss-averse and among those who had a strong wish to protect their heirs.

“Survey respondents… who clearly identify a family member as a potential beneficiary are significantly more likely to select annuities,” the paper said. “This intriguing result could suggest instead that individuals who are worried about becoming a burden on family are more open to the idea of annuities; more research is needed to better understand the tradeoff between bequests and dependence.”

At the same time, “Characteristics predicted to be important based on traditional economic models, such as health, life expectations, saved assets, and numeracy, are either insignificant or small in their effect,” the paper said.

About one in five people in the study would never buy an annuity. “Some people simply dislike the idea of an annuity a priori, and are unwilling to consider these products even with a suggested substantial economic benefit,” the authors wrote. The “annuity haters,” as the authors called them, always said they would rather manage without an annuity than take any of the hypothetical annuity options offered to them.

The finding that 20% of people hate annuities doesn’t mean that 80% of people intend to buy annuities, Zeithammer told RIJ in an email. “We define ‘annuity haters’ as people with a knee-jerk reaction to annuities, i.e. people who are rejecting even annuities with very high expected NPV. The opposite of ‘annuity hater’ is thus not necessarily an ‘annuity lover.’ For example, the 78% of people who are not ‘annuity haters’ includes people who pick only one or two annuities over the course of 20 choice-tasks.”

© 2018 RIJ Publishing LLC. All rights reserved.

How to Make Your Widow Merrier

Posted on September 21, 2018 by -

My wife, who is six years younger than I am, gets tired of hearing about retirement planning. Understandably so. But when I told her that I plan to keep working and delay Social Security until I turn 70 so that she will receive the largest possible monthly benefit after I’m gone, I was sure she’d get weepy and throw her arms around my neck.

“That’s nice,” she said, not looking up, and continued playing an electronic word game on her iPad.

It can be a long, lonely walk from age 62, when most working Americans become eligible for Social Security benefits, to age 70, when the government stops rewarding those who defer. Only about 4% of women and 2% of men claim at 70, even though their benefits would be as much as 50% higher than at age 62 and 25% higher than at 67.

Most people who promise to work to age 70 and wait for the highest benefit end up breaking that promise. I get that. If you’re 63 and you see friends retiring, or if your bones tell your brain that it’s quitting time, or if your advisors tell you can afford it, then you might as well retire and, while you’re at it, file for Social Security.

Some people should file early. Our neighborhood plumber, Dell, is a chain-smoker in his mid-50s. He hacks and coughs through every house call. “My allergies are acting up again,” he says. Dell works on his knees and elbows, with a flashlight, squinting at copper and PVC pipes. He’d be wise to claim at age 62 (if not Social Security Disability Insurance before then) because honestly, he may not see the other side of 70.

Other people have no reason to wait. Our friend Phil, a writer who has millions in real estate and low cost-basis Apple stock, filed for benefits at age 62. The cash flow, such as it is, helps him stay fully invested. As for longevity risk, he may need to liquidate something someday, but he’ll never be broke. His ex-wife is rich and their kids have trust funds.

I’m not certain that Dell or Phil ever studied Social Security’s rules. (Who does, besides Bill Reichenstein, Larry Kotlikoff, or Alicia Munnell’s team at Boston College?) Most people file either at age 62, at full retirement age (FRA) or when they retire. Those are the most obvious options. It’s simpler to use them than to study the rules (or use software) and try to optimize the claiming date. (FRA is 66 for Boomers born in 1954 or earlier. It increases by two months per birth year thereafter, reaching 67 for those born in 1960 or later.)

In my own case, I decided to delay retirement and Social Security until age 70 because A) I can, since I’m self-employed, and B) because I don’t want to dip into savings until then. This strategy maximizes our family income stream while I’m alive, maximizes my wife’s income stream when she’s a merry widow, and conserves assets for our kids.

Curiously, many educated Americans have never heard of the spousal benefit. One friend of mine, a doctor in his 60s who was born outside the U.S. (where spousal benefits are rare or non-existent), didn’t know that his non-working wife can receive half of his benefit while he’s alive and his entire benefit when he’s dead. A couple I know, both 61, where the Ph.D. wife was the primary earner, were surprised when I told them that the husband can claim either his own earned benefit or half of her benefit, whichever is higher (They plan to claim at FRA or later.)

Even the experts get confused about Social Security’s rules. In early August, at the 20th Research Consortium of the Centers for Retirement Research at Boston College and the University of Michigan, which are funded by the Social Security Administration, I told one of the researchers, who represented a prestigious college, about my plans to maximize my wife’s benefits during my absence.

She said I was flat wrong in believing that a widow or widower can inherit the benefit that a primary-earning spouse achieved by delaying benefits until age 70. She declared that the most a surviving spouse could receive from Social Security would be the late primary-earner’s benefit as of full retirement age, or FRA. Busted.

Or maybe not. I opened my 2016 copy of “The Social Security Claiming Guide,” produced by Steve Sass, an economist and researcher at the Center for Retirement Research at Boston College. On page 11, it said, “A husband can increase the monthly benefit his wife gets as his survivor more than 20% if he claims Social Security at 66, not 62, and 60% if he claims at 70.” (Italics added.)

In an email exchange, Sass confirmed the accuracy of the text in the Guide, but urged me to call Stephen Goss, the Chief Actuary of Social Security, for the final word. Goss responded to my email by saying, “They’re both right!” The Guide was correct, he said, but added that it was true only if the surviving spouse had reached FRA.

“If for example the deceased had waited to start retired worker benefit until age 70, with a FRA of 66, then that worker was receiving 132% of PIA [primary insurance amount] at death,” Goss wrote. “If at that point the surviving spouse is FRA or older, they will get the 132% of the deceased worker’s PIA. If however, the surviving spouse is under FRA, say age 60 at the death of the worker, then they get 71.5% of the deceased worker’s benefit, which was 132% of PIA. So 1.32 x 0.715 x PIA” would be the 60-year-old’s benefit.

Later, I told my wife the whole yarn: how I thought I could maximize her benefits by working until age 70, then I worried that I couldn’t do that, but then the Chief Actuary of the Social Security Administration assured me that she would in fact receive the maximum benefit, just as soon as I migrate to the Great Platform in the Cloud.

“That’s nice,” she said, not looking up, and continued playing an electronic word game on her iPad.

© 2018 RIJ Publishing LLC. All rights reserved.

Will Small Employers Adopt Multiple Employer Plans?

Posted on September 21, 2018 by -

President Trump’s August 31 Executive Order (EO) on Strengthening Retirement Security in America could be a game changer for the retirement prospects of workers at small businesses. According to the Bureau of Labor, while 89% of workers of larger employers (500 or more employees) have access to retirement plans, for workers at smaller employers (less than 100 employees) that proportion drops to 53%¹. This clearly contributes to the $4.13 trillion aggregate retirement savings shortfall that EBRI estimates American workers face, according to its Retirement Security Projection Model.

First, some background: Why do small employers refrain from offering retirement plans? Cost is a key factor. A Pew Charitable Trusts survey found that the top reason small business owners give for not offering a retirement plan is cost (followed by resources).² More widely available multiple employer plans (MEPs) could alleviate cost burdens by allowing small employers to band together and gain economies of scale.

Trump’s EO calls for expanding access to multiple employer plans by addressing issues that have prevented widespread adoption of such plans. Namely, the EO instructs the Secretary of Labor to consider new rules around when a group or association of employers qualify for a MEP (the “common nexus” requirement). It asks the Secretary of the Treasury to consider amending regulations to address consequences if employers within MEPs fail to meet plan requirements (the “one bad apple” rule).

Whether both the common nexus and one bad apple rules can be properly addressed is the subject of a different blog. Further, we’ll let others assess whether the hoped-for economies of scale will actually materialize. But assuming the answer to all of the above is “yes,” a further question is: Will small employers adopt more widely available MEPs?

The data are mixed. In one provider survey, 33% of small employers (5–99 employees) indicated that they would be likely to consider a MEP if easily accessible. Meanwhile, the Transamerica Center for Retirement Studies finds that among companies that say they are not likely to offer a 401(k) plan — many of which cite not being big enough — a quarter would consider joining such a MEP.³ However, 23%  were “somewhat likely” to do so — only 2% said they were “very likely.” The Transamerica study also points out that less than a third of employers view an employee-funded retirement plan as very important in attracting and retaining employees.

At the same time, among small companies that do not offer a 401(k) or similar plan, Pew found that about a quarter were likely to begin sponsoring a plan in the next two years — and this was before the EO. It is possible that a MEP gives such plan sponsors an easier pathway to offering benefits, allowing them to more easily change their intentions into action. And indeed, nearly half of those in the study said that availability of a plan with reduced administrative requirements would increase the likelihood of their organization offering a retirement plan in the future.

Assuming that a third of small employers that do not currently offer DC plans adopt MEPs going forward, preliminary estimates from EBRI’s Retirement Security Projection Model indicate that the $4.13 trillion aggregate retirement savings shortfall would be reduced by $65 billion.

But this assumes 100% participation among eligible employees, and that small businesses joining MEPs will implement plans that look similar to existing plans of companies of their size. The majority of small employers, according to the Pew survey, do not offer automatic enrollment or automatic contribution escalation, although many offer employer contributions.

If cost is truly the reason small employers don’t currently offer such plans, it is possible that fewer employers that participate in MEPs will offer employer contributions than average. Without automatic enrollment and automatic contribution escalation, participation in such plans may be low.

Importantly, in the Transamerica survey, 88% of workers believed that the value of a 401(k) or similar plan is an important benefit, and 81% agreed that retirement benefits offered by a prospective employer were a major factor in the final decision to accept a job.

Other possible proposals and alternatives to increase coverage exist:

  • President Obama’s proposed Automatic IRA program: estimated to reduce the retirement savings shortfall by $268 billion4.
  • The Automatic Retirement Plan Act (ARPA) of 2017: estimated to decrease the deficit by $645 billion5.
  • Universal DC plans: estimated retirement savings shortfall would decline by $802 billion6.

1March 2017
2Small-Business Views on Retirement Savings Plans: Topline Results of Employer Survey. 2016 Pew Charitable Trusts report.
3Striking Similarities and Disconcerting Disconnects: Employers, Workers, and Retirement Security. 18th Annual Transamerica Survey, August 2018.
4Under the Obama proposal, the model assumes a 3% default contribution rate and no opt-outs. It further assumes that there were no employer contributions and that no current defined-contribution-plan sponsors decided to discontinue their current plan and shift to the auto-IRA.
5ARPA assumes triennial automatic enrollment with a default contribution rate of 6 percent, and auto contribution escalation at 1 percent per year [up to 10 percent]. Assumes no opt-outs for this calcuation.
6This analysis assumes that all employers offer a type of plan and a set of generosity parameters similar to employers in their size range. Assumes observed contributions and opt-outs.

© 2018. Employee Benefits Research Institute.

New FIA bets on growth in aging-related industries (Duh!)

Posted on September 21, 2018 by -

A-CAP and Saybrus Partners have launched a new fixed indexed annuity (FIA), Retirement Plus Multiplier Annuity, that offers exposure to “companies… that may benefit from the growth in the older population in the U.S,” according to a release this week.

The new FIA is billed as the only product offering access to the Goldman Sachs Motif Aging of America Dynamic Balance (“Thematic Index”). The index targets the stocks and bonds of companies in the healthcare and real estate sectors that may benefit from the Boomer age wave.

Issued by Sentinel Security Life Insurance Company and Atlantic Coast Life Insurance Company, two A-CAP subsidiaries, the product is available through Saybrus Partners and selected independent distributors. The index is the work of Goldman Sachs and Motif Capital Management of San Mateo, California, whose website features indexes on the national defense industry and aging-related industries.

The top five holdings of the Aging of America index, according to a whitepaper on the Motif Capital website, are Johnson & Johnson, Amgen, UnitedHealth Group, Novo-Nordisk, and Pfizer. The index includes companies that “stand to benefit from the demand for treatments and therapies due to a fast-growing senior population, increased government spending on healthcare programs and the rise in demand for assisted living facilities.

According to product literature:

The product’s allocation framework “will generally result in higher weighting to components exhibiting lower historical volatility and lower weighting to components exhibiting higher historical volatility. Additionally, a momentum signal is applied to the 10-year U.S. Treasury Rolling Futures constituent. The momentum signal looks at recent performance, based on a predetermined set of rules, with the aim of reducing the allocation to that component, if the momentum signal is not positive. The sum of the weights of the equity and fixed income constituents in the Goldman Sachs Aging of America Dynamic Balance Index, will be less than or equal to the maximum weight of approximately 150% (An allocation above 100% represents leveraged exposure to the Index).

The index is a rules-based methodology that seeks to provide dynamic exposure to the equity and fixed income components. Risk is monitored daily, and re-balancing generally results in higher weighting in components with lower historical volatility and less weight to those with higher historical volatility. The index has a 5% volatility cap and to the extent the volatility cap is exceeded, the money market allocation is increased. The index is calculated on an excess return basis. Retirement Plus Multiplier offers two index accounts, a one-year point-to-point with a participation rate and a three-year point-to-point with a participation rate.

“The Thematic Index coupled with the A-CAP insurance platform and the Retirement Plus Multiplier Annuity will allow seniors to grow their retirement returns based on a unique formula tailored to the needs of the aging senior market,” said Doug George, Head of Life and Annuity for A-CAP, in the release.

Andrew Sheen, managing director, product development for Saybrus Partners, said that through the product’s index crediting strategies “contract holders can participate in the potential growth of the companies that serve their own demographic.”

Contract owners holders can choose a Growth Benefit for accumulation or an Income Multiplier Benefit for retirement income. The Growth Benefit provides added sensitivity to positive market performance. The Income Multiplier Benefit provides a Guaranteed Lifetime Withdrawal Benefit (GLWB) that offers monthly income based on a percentage of up to 60% more than the contract’s accumulation value, depending on how long the owner delays taking income.

A-CAP, a privately held holding company launched in 2013, owns multiple insurance and financial businesses, including primary insurance carriers, an SEC registered investment adviser, an administrative services provider, reinsurance vehicles, and marketing organizations.

Saybrus Partners represents the life and annuity portfolios of select carriers in several channels, including independent marketing organizations, insurance agents, broker dealers and financial institutions.

© 2018 RIJ Publishing LLC. All rights reserved.

CFP quarterly debuts with article on managing longevity risk

Posted on September 21, 2018 by -

The first issue of Financial Planning Review, a peer-reviewed academic journal from the CFP Board Center for Financial Planning contains articles on the “mental accounting” aspect of financial behavior, how financial planners encourage retirement planning, the tendencies to over- or under-spend, and strategies for managing longevity risk.

“The Financial Planning Review will help address the current shortage of qualified faculty to teach financial planning by [enabling them] to publish research that builds the financial planning body of knowledge,” said Marilyn Mohrman-Gillis, executive director, CFP Board Center for Financial Planning, in a statement.

Published quarterly by John Wiley & Sons, the review will feature research on:

  • Financial planning
  • Portfolio choice
  • Behavioral finance
  • Household finance
  • Psychology and human decision-making
  • Financial therapy, literacy and wellness
  • Consumer finance and regulation
  • Human sciences

Accepted papers will span a broad range of research methodologies and data analyses. Some of the papers featured in the first issue include:

Perspectives on Mental Accounting: An Exploration of Budgeting and Investing, by C. Yiwei Zhang and Abigail Sussman, Booth School of Business, University of Chicago.

According to the paper, mental accounting is “the set of cognitive operations used by individuals and households to organize, evaluate, and keep track of financial activities (Thaler, 1999)…This article provides a summary overview of mental accounting within the context of consumer financial decision-making.  We first discuss the categorization process that underlies mental accounting and the methods people use to categorize funds. We then turn to implications of mental accounting for budgeting, spending, and investment decisions.

The Relationship Between Financial Planner Use and Holding a Retirement Saving Goal: A Propensity Matching Analysis, by Kyoung Tae Kim, Tae-Young Pak, and Su Hyun Shin (University of Alabama) and Sherman D. Hanna (Ohio State University).

This paper “used data from the 2010 and 2013 Survey of Consumer Finances to examine the association between financial planner use and setting a retirement saving goal.” The authors “found that households who consulted a financial planner were more likely to report retirement as the motive for saving… The use of other types of financial professionals was not positively associated with the likelihood of setting retirement as an important saving goal in our main model.”

Tightwads and Spendthrifts: An Interdisciplinary Review, by Scott Rick
Ross School of Business, University of Michigan.

According to this article, neither over-spenders nor under-spenders “are happy with how they handle money. In the decade since the tightwad/spendthrift construct was introduced… Much has been learned about what it is and is not (e.g., frugality, greed), what contextual factors are likely to reduce its importance, how it plays a role within romantic relationships, and when it might first emerge in childhood. This paper reviews the wide range of interdisciplinary research relevant to the tightwad-spendthrift construct and proposes several directions for new research.”

Household Financial Planning Strategies for Managing Longevity Risk, by Vickie L. Bajtelsmit and Tianyang Wang, Colorado State University.

This study “shows that the top third of households by longevity need approximately 20% more retirement wealth than those households who live only an average life span. Investigations of various risk mitigation strategies suggest that combination strategies, particularly those that include delayed retirement, can significantly reduce the retirement wealth target.”

The journal is available electronically from the Wiley Online Library and the Center website. Each edition of the Review will also be distributed electronically to more than 82,000 Certified Financial Planner professionals throughout the U.S.

In the coming months the Center intends to launch a Body of Knowledge website containing additional papers, videos, and interactive capabilities relevant to financial planning practitioners and firms.

Co-editors of Financial Planning Review are Vicki Bogan, Ph.D., Cornell University; Chris Geczy, Ph.D., Wharton School, University of Pennsylvania; and John Grable, Ph.D., CFP, University of Georgia. The executive editor is Charles R. Chaffin, Ed.D., Director of Academic Initiatives at the CFP Board Center for Financial Planning.

© 2018 RIJ Publishing LLC. All rights reserved.

Playing the ‘Newlywed Game’ with near-retirement couples

Posted on September 21, 2018 by -

Anybody who advises retirement clients probably knows that married couples collaborate on decisions about when to retire, what to do in retirement, and how to spend their money in retirement. Women, after all, are often co-breadwinners and are perhaps increasingly likely to out-earn their husbands.

As the co-authors of a recent study, “Understanding Joint Retirement” (NBER Working Paper 25030), point out, “Since the labor force participation rate of women has grown substantially over the last decades, understanding their retirement decisions has gained importance. Moreover, there is clear evidence that the retirement decisions within couples are interdependent, with a significant proportion of spouses retiring at between 20% and 30% of all couples retire within one year of each other.”

But because women so often left the workforce before retirement age, most studies on retirement timing behavior have focused on men. This obsolete imbalance is something that the paper’s authors (Pierre-Carl Michaud of HEC Montreal in Canada, Arthur van Soest of Tilburg University in the Netherlands, and Luc Bissonnette of Universite Laval in Canada), set out to correct by surveying of near-retirement couples and publishing their analysis of the survey data.

One of their most interesting findings: “On average, men have a biased view of the preferences of their wives. They overestimate their wives’ marginal utility of leisure, and will therefore more often choose scenarios with earlier retirement of the wife than their wives themselves choose.” In other words, men often underestimate their wives’ inclination to keep working.

The researchers’ methodology was slightly reminiscent of The Newlywed Game, the television game show that premiered in 1966 on the ABC network. In the game, newlyweds were asked to describe their spouses’ preferences or predict their spouses’ answers to certain questions.

In their survey, the researchers showed couples “several pairs of simplified retirement trajectories” and “asked [them] to choose between two trajectories three times: first only accounting for their own preferences, then using only their spouse’s preferences, and finally they were asked what would be the most likely choice of their household, accounting for both individuals’ preferences as well as the decision-making process in their household.”

Example of survey content

An advisor might use the same general approach to find out if spouses’ expectations of retirement dates or inclinations toward working in retirement were aligned or not. The researchers, however, suggested that policymakers—whatever or whoever they are—should not make the mistake of assuming that husbands and wives view retirement the same way.

Their binary approach, they claim, “empirically outperforms the neo-classical unitary model assuming that each household behaves as a single decision maker, both for consumption and labor supply behavior… Ignoring joint retirement may severely underestimate the overall impact of reforms in retirement policy.” They cite other research showing that failing to account for the possibility, for instance, that a wife’s preferences would change a husband’s retirement behavior, “may underestimate the overall impact of a typical policy by 13% to 20%.”

© 2018 RIJ Publishing LLC. All rights reserved.

New Fidelity TDFs are funds of active and passive funds

Posted on September 21, 2018 by -

Fidelity Investments has launched a new series of 13 target-date funds (TDFs), called Fidelity Freedom Blend Funds, with retail and advisor share classes. They use the same glide path, investment process, and resources as existing Fidelity target-date fund series but are combinations of index and actively managed funds.

“We have offered target-date blend strategies in commingled pools for the past five years. We are introducing the Freedom Blend funds to meet the growing demand from clients who have been asking for a target-date strategy that incorporates a balanced mix of active and passive investment capabilities in a single mutual fund,” said Eric Kaplan, head of Target-Date Product, in a release.

“The Fidelity Freedom Blend Funds, just like the Fidelity and Fidelity Advisor Freedom Funds and Fidelity Freedom Index Funds, include a diversified mix of investments designed to help grow retirement savings during investors’ earning years, support an individual’s income needs through their retirement years, and provide protection from market volatility throughout an investor’s lifetime,” said Andrew Dierdorf, portfolio manager, Fidelity Investments.

Dierdorf and Brett Sumsion will co-manage the Freedom Blend funds. The pair also co-manages Fidelity Freedom Funds, for which they were nominated for 2017 Morningstar Fund Managers of the Year.”

Each Freedom Blend Fund will launch with nine share classes offering different expense levels. For example, expenses for the retail and I share classes will range from 0.46%–0.54% depending on the target year, while the K6 and Z6 share classes will range from 0.26%–0.34%, the Fidelity release said.

The mix of active and low-cost passive investments will vary based on the target year with passive investments generally expected to range between 20% and 60% of each fund portfolio.

Fidelity Freedom Blend Income and 2005 through 2015 Funds seek high current income and, as a secondary objective, capital appreciation. Fidelity Freedom Blend 2020 through 2060 Funds seek high total return until their target retirement date. Thereafter, each fund’s priorities will be high current income and, secondarily, capital appreciation.

Reduced fee schedule for FIAM Blend Target Date Commingled Pools

Fidelity Investments is also introducing a new, reduced fee schedule for the Fidelity Institutional Asset Management (FIAM) Blend Target Date Commingled Pools. Current FIAM Blend Target Date customers are now eligible for either a lower price in an existing share class or a less expensive share class option, depending on their current FIAM target date assets. FIAM Blend Target Date Commingled Pools are available for institutional investors, including retirement plans. The new pricing is effective September 1, 2018.

© 2018 RIJ Publishing LLC. All rights reserved.

MassMutual stakes out thought-leadership in pension risk transfer services

Posted on September 21, 2018 by -

Planting its flag in the growing pension risk transfer business, Massachusetts Mutual Life Insurance Co. (MassMutual) has published a white paper to help guide and inform employers about how to successfully de-risk and potentially transfer defined benefit (DB) pension obligations.

The white paper, “Pension Risk Transfer: Insights from an institutional risk manager about how to successfully de-risk and transfer pension obligations,” is designed to be a primer for evaluating pension risks and determining potential courses of action to manage those risks over time.

The white paper was created by MassMutual’s Institutional Solutions unit, which offers defined benefit pension management, pension risk transfer (PRT) solutions, and other institutional investment offerings.

The PRT market has been growing steadily, especially in recent years as economic and regulatory factors have converged, prompting plan sponsors to reconsider their risk management strategies, according to a MassMutual release.

Single premium PRT product sales in the United States were $23.9 billion in 2017, up from $13.7 billion in 2016, a 68% increase, according to a survey of sales by the LIMRA Secure Retirement Institute. The growth has continued with $9.6 billion in sales through June 2018, LIMRA reports, as more employers have moved to shift risk off their balance sheet.

MassMutual attributed the rising sales of PRTs to a confluence of economic, regulatory and other factors, including a long bull market, which helped improve pension funding ratios.  The equity markets have prompted some pension sponsors to secure their gains and leverage improved pension funding ratios to explore the feasibility of removing pension liabilities from their balance sheets, he said.

Tax reform has also given PRT a boost as U.S. companies had until mid-September of this year to take advantage of the higher 35% corporate tax rate when deducting contributions to DB plans from their federal taxes. Afterwards, the new 21% corporate rate applied.

The federal government is also passing on higher costs for backstopping pensions to employers, providing further motivation for employers to consider PRT, according to the release. Premiums for the Pension Benefit Guarantee Corp. (PBGC) have climbed dramatically, with the per-participant flat premium rate for plan years beginning in 2018 now $74 for single-employer plans (up from $31 in 2007) and $28 for multiemployer plans (up from $8 in 2007).

MassMutual’s white paper discusses both short- and long-term risks to pensions, evaluates specific risks such as longer lifespans for both workers and retirees, examines complications from pension benefit options, weighs “carve-outs” of pension participants, reviews considerations for pension assets and how they are invested, and suggests how sponsors should evaluate pension managers.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on September 21, 2018 by -

Benartzi to partner with Acorns, a financial wellness system

Acorns, the country’s fastest-growing financial wellness system with four million users, today announced that Shlomo Benartzi, professor and co-founder of the Behavioral Decision-Making Group at UCLA Anderson School of Management, has joined as Chair of the Behavioral Economics Committee.

Benartzi is building a network of behavioral scientists to launch “Money Lab,” an initiative that aims to create, test and build solutions to increase the financial well-being of “the up and coming” in America, with a special focus on savings and investment.

The first call for research proposals for field experiments focused on reducing consumer spending has proved that there is great interest in the initiative: academic teams from 25 universities, including Carnegie Mellon, Chicago, Colorado, Columbia, UCLA and Yale have submitted project ideas.

With Nobel Laureate Richard Thaler of the University of Chicago, who is also an advisor to Acorns, Benartzi pioneered the Save More Tomorrow (SMarT) program, a behavioral prescription designed to help employees increase their savings rates gradually over time.

Benartzi’s first experiment powered by Acorns focuses on the way customers respond to a simple question: Would they like to save $5 every day, $35 a week or $150 a month? The total amount of money set aside is practically the same, yet while only seven percent opted to save $150 a month, nearly 30% decided to save $5 a day.

“Saving $5 a day makes us think about skipping a Starbucks latte (that seems doable), while $150 a month makes us think about car payments, which is a much more daunting amount to give up,” Benartzi concludes.

These findings showed that framing investments as daily versus monthly can close the savings gap between the lower and upper income users; for example, someone who is making $25,000 a year and saves $5 daily can close the retirement savings gap with someone who makes $100,000 annually, an Acorns release said.

AIG to acquire Glatfelter, a broker and insurer

American International Group, Inc. has entered into a definitive agreement to acquire Glatfelter Insurance Group, a full-service broker and insurance company providing services for specialty programs and retail operations, according to an AIG release this week.

The transaction is expected to close in the fourth quarter of 2018, subject to customary closing conditions, including regulatory approvals and clearances in relevant jurisdictions.

Headquartered in York, Pennsylvania, “Glatfelter brings high-quality program underwriting capabilities that will accelerate the strategic positioning of AIG’s General Insurance business. The terms of the transaction were not disclosed,” the release said.

Glatfelter’s operations include approximately 3,000 brokers serving approximately 30,000 insureds in the U.S. and Canada. Upon closing, Glatfelter CEO Tony Campisi will report directly to David McElroy, the incoming CEO of AIG General Insurance’s Lexington business.

Principal wants to chat with retirement plan administrators

A “first-of-its-kind online chat feature to answer retirement plan administrative questions” will be launched this fall by Principal Financial Group, the retirement plan provider announced this week. Principal client service associates will chat with plan sponsors “in real time throughout their workday.”

Administrators of small and medium-sized plans can devote only about 5-10% of their time to managing the plan, Principal said, so real-time support is essential. o the ability to quickly accomplish tasks and get back to running their business is essential. “Online chat can be the best of human customer service and technology combined,” said Jerry Patterson, senior vice Pres. of Retirement and Income Solutions at Principal.

The new chat feature will be launched in a staged format to a pilot group of small and medium business customers beginning this fall. At launch, the service will be available from 8 a.m. to 5 p.m. CT. Until then, there’s an example of the chat service online here.

Principal beefs up wellness offering

With an estimated 50% of Principal Financial Group is expanding its financial wellness resources, at no additional costs to participants or their plans, through a partnership with iGrad’s Enrich financial wellness platform.

The new Principal Milestones program is designed to give participants centralized access to financial education resources. The platform addresses student loans, preparation of wills and other legal documents preparation powered by ARAG, Health Savings Accounts, and budgeting.

Findings released in April from a research project by Principal and behavioral economist Dan Goldstein show that seven in 10 Americans postpone making financial decisions, with less than one-third saying they feel comfortable with the amount of knowledge they have about managing finances,.

The behavioral research showed, however, that people “who spend even a little bit of time learning about financial planning are 75% more likely to be confident in their financial future.”

Enrich uses an online assessment to evaluate an individual’s strengths and weaknesses and then delivers personalized information on how to spend less than they earn, save for emergencies and plan for the future, a Prudential release said.

Enrich provides strategies to help participants pay off student loans, plan for a child’s college education, budget or use health savings accounts, as their cases demand.

Principal has for several years provided Principal Retire Secure (1-on-1 workplace education meetings from a retirement professional), a set of webinars with live chat, resources for advisors and plan sponsors, and the Retirement Wellness Planner, which allows users to link any external account information and adjust for their household situation.
iGrad, a financial wellness education company based in San Diego, offers two white-label platforms: iGrad and Enrich. Enrich personalizes financial information for each person’s situation and needs. It also offers tools, quizzes, videos, articles and a library of multimedia content. The company’s platform for higher education, also called iGrad, is established at more than 600 colleges and universities.

ARAG is a provider of legal insurance with a premium base of $2 billion and 17.5 million family clients worldwide. Nearly 4,000 individuals set up their accounts and created a total of 4,700 documents in the three months after Principal began offering the service, Principal said.

© 2018 RIJ Publishing LLC. All rights reserved.

Research Roundup

Posted on September 13, 2018 by -

Our ability to outsmart ourselves knows no bounds. Famous books and plays like Oedipus Rex, King Lear, Moby Dick, Anna Karenina etc. have all dramatized the universality of “hubris” and its dire consequences. That’s one good reason to read great books.

With the emergence of “behavioral finance,” the field of economics is catching up with literature. We now know that instead of using semi-rational homegrown rules-of-thumb when investing in equities, we should buy index funds and not try to beat the market.

Or do we know that? In a new paper about the psychological drivers of capital asset prices, Yale School of Management professor Nicholas C. Barberis arrives at a counter-intuitive conclusion. He recommends a specific investment strategy, and it’s not passive.

The smart approach, he claims, involves “an active trading for rational investors, one where investors tilt their portfolios toward low price-to-earnings stocks and gently time the stock market to take advantage of return predictability.” In other words: Actively managed funds with a value tilt.

Products that help even retail investors do that already exist, he adds. In the past few years, he writes, “new financial products have appeared that exploit mispricing” by mechanically buying and selling assets with these characteristics, which have “genuine predictive power” (The plus and minus signs indicate whether the characteristic has positive or negative predictive power):

  • Past three-year return –
  • Past six-month return +
  • Past one-month return –
  • Earning surprise +
  • Market capitalization –
  • Price-to-fundamentals ratio –
  • Issuance –
  • Systematic volatility –
  • Idiosyncratic volatility –
  • Profitability +

“These new products are attracting large flows from institutional investors and are drawing interest from households too,” Barberis writes. He’s referring to factor investing, of course, though he doesn’t say that in the paper. “Factor-based funds may be an attractive addition to a portfolio over and above index funds,” he told RIJ in an email.

Does he recommend factor funds on a net-of-fees basis? “Yes I do,” he said, “so long as the fees are low, of course. My understanding is that some of these products do have low fees now – but not all, so some care is needed.”

Most of the paper describes discussion of Barberis’ search for a “unified psychology-based model of investor behavior might take.” He reviews existing literature on behavioral finance and concludes that such a model might combine “extrapolative beliefs” (where expectations about the future are based on past experience) and “gain-loss utility” (the idea that losses hurt more than gains feel good)—a pairing on which very little work has been done, he writes.

In other recent research:

Air Pollution Can Promote Dementia

Air pollution contributes to the development of dementia in older adults according to this study, which tested linked 15 years of Medicare records for 6.9 million adults age 65 and older to the EPA’s air quality monitoring network and tracked the evolution of individuals’ health, onset of dementia, financial decisions, and cumulative residential exposure to fine-particulate air pollution (PM2.5).

“A one microgram per cubic meter (μg/m3) increase in average exposure between the ages of 76 and 85 is associated with a 1.06 percentage point increase in the dementia rate at age 85,” write Kelly C. Bishop, Jonathan D. Ketcham, and Nicolai V. Kuminoff, all of Arizona State University in their paper, “Hazed and Confused: The Effect of Air Pollution on Dementia” (NBER Working Paper 24970).

The paper also suggests that one of air pollution levies a cost to the U.S. economy by impairing the financial decisions of older adults. “We estimate that the dementia-related benefits of the EPA’s county nonattainment designations exceeded $150 billion,” the authors write.

Low-income Americans living in high pollution areas are especially vulnerable to this effect. “Our data show that African-American and Hispanic individuals are about twice as likely to acquire dementia, as are people who live in areas with lower income and less education. Our results suggest that differences in neighborhood air quality may contribute to these socioeconomic disparities in disease burden,” the paper said.

Why Investors Still Buy Actively Managed Funds

Starting with the assumption that index funds are better than actively managed funds, J.B. Heaton of the University of Chicago Law School and Ginger L. Pennington, a psychologist at Northwestern University, ask why “many investors remain committed to active investing despite its poor relative performance.”

The conclusion: Many investors associate extra effort with better performance; they therefore tend to believe that actively managed funds are likely to outperform index funds. For that reason, they also tend to be swayed by advertising that stresses the effort that fund managers put into picking stocks.

“We explore the behavioral economic hypothesis that investors fall prey to the conjunction fallacy, believing good returns are more likely if investment is accompanied by hard work,” they write in their paper, “How Active Management Survives” (SSRN, June 2018). “This is an especially plausible manifestation of the conjunction fallacy, because in most areas of life hard work leads to greater success than laziness.”

“Our internet survey results show that from 30% to over 60% of higher-income, over-30 individuals fall prey to the conjunction fallacy in this context, raising significant questions for law and regulatory policy,” they write, adding that regulators should provide stronger investor protections than the Regulation Best Interest recently proposed by the Securities and Exchange Commission.

“That rule would not require what would be most valuable: a clear, evidence-based warning attached to actively-managed products disclosing the average superiority of more inexpensive passive strategies. Perhaps we should a warning similar to drug warnings: “Many active investment strategies underperform more inexpensive alternatives. Ask your broker for more information.”

Early and Late Reactions to Fed “Policy” Shocks Still Valid

In a new paper on the effects of U.S. Federal Open Market Committee (FOMC) policy announcements on asset prices, Andreas Neuhierl and Michael Weber suggest that asset prices keep changing for up to 25 days before and 15 days after the official announcement, even when the changes surprise the market.

As the two authors argue in “Monetary Momentum” (NBER Working Paper No. 24748), investors who pursue a “monetary momentum” timing strategy based on interest rate movements are therefore wrong to focus attention only on changes in asset prices during the 30 to 60 minutes before and after the announcement.

“Such a narrow focus may underestimate the effect of monetary policy,” the authors write. A monetary momentum strategy invests in the market when a monetary policy shock is associated with lower rates and shorts it when the shock is associated with higher rates.

A monetary policy surprise, or “shock,” is defined here as a policy announcement for which the FOMC announced a rate lower or higher than the rate predicted by federal funds futures contracts before the FOMC meeting.

The researchers conclude that so-called surprise changes in target FOMC interest rates might be partially predictable, a fact that would have “important implications for the large literature… that tries to understand the real effects of exogenous monetary policy shocks on real consumption, investment, and GDP.”

Can You Trust Fintech Firms as Much as Banks?

Who would you trust more with your deposits: Banks or fintech companies?

Because banks have access to insured deposits and provide valuable depository services to their customers, and because fintech platforms are entirely investor-financed, banks are innately more trustworthy for depositors than fintech platforms, write Nobelist Robert Merton of the MIT Sloan School of Management and Richard T. Thakor of the University of Minnesota.

This provides banks with a competitive advantage over non-depository lenders on the trust dimension, they say in a recent paper, “Trust in Lending” (NBER Working Paper 24778). They claim to be the first economists “to theoretically model trust-based intermediation and use it to characterize the impact of fintech firms on the credit market.”

“Our basic idea is that trust insulates lenders from the adverse reputational consequences of loan defaults, and the degree of insulation depends on market conditions. Whether they are trusted or must rely on reputation, the depository (customer) relationships banks have are a source of rents—unavailable to fintech lenders—that influence banks to make good loans in some states even when they are self-interested,” they write.

“This is what enables banks to survive when trust is lost, a circumstance in which fintech lenders shut down,” they add. “Trust is asymmetric—it is easier to lose it than to gain it. The importance of trust varies across banks and fintech lenders. While banks may be able to operate without trust, investor trust is essential for fintech lenders to be able to operate.”

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