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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.”

© 2018 RIJ Publishing LLC. All rights reserved.

Fidelity Launches Two More Zero-Expense Funds

Posted on September 13, 2018 by -

The Empire in Boston strikes back again—betting that it can regain mutual fund leadership by following (and one-upping) the indexing leaders.

Fidelity Investments has doubled its stable of zero expense ratio mutual funds by launching Fidelity ZERO Large Cap Index Fund (FNILX) and Fidelity ZERO Extended Market Index Fund (FZIPX).

Individual investors can buy the two new funds with no investment minimums starting September 18, 2018. The large cap index fund is comparable to an S&P 500 index funds and the extended market index fund buys mid-cap and small-cap company shares.

Fidelity’s first two zero expense ratio funds, ZERO Total Market Index Fund and ZERO International Index Fund, appeared August 2 and have since grown to more than $1 billion in assets. Together, the four Fidelity zero-expense ratio equity funds provide market exposure to over two-thirds of industry index assets.

For several years, index funds (including exchange traded funds), primarily from Vanguard and BlackRock iShares, have captured most of the net fund flows at the expense of traditional actively managed fund specialists like Fidelity and Franklin Templeton.

Managers of index funds try to replicate the performance of the stocks or bonds that are included in specific indexes, which represent all of the assets within a certain market segment, such as large-cap stocks, value stocks or high yield bonds.

Active fund managers try to beat the performance of specific indexes by choosing specific stocks or overweighting in stocks with specific characteristics. Because actively managed funds can have higher much higher fees than index funds, active managers must overcome a performance handicap in order to beat the performance of a closely-related index fund.

In the year ending July 31, 2018, Vanguard funds attracted more than $226 billion in net flows and BlackRock iShares attracted $122.3 billion. Fidelity attracted just over $42 billion for the year. In July alone, Vanguard index funds attracted $16.4 billion, SPDR State Street Global Advisors ETFs attracted $10.4 billion ($6.6 billion into its S&P 500 Index ETF SPY alone), and Fidelity index funds attracted $6.9 billion.

A chart provided by Fidelity compared its two new funds favorably with the Vanguard 500 Index Fund, which charges 14 basis points (0.14%) per year, and Vanguard Extended Market Index Funds, which charges 21 basis points (0.21%) per year. Both funds require a minimum initial investment of $3,000.

All of Fidelity’s stock and bond index funds and sector ETFs have total net expenses lower than all of Vanguard’s comparable funds, according to the Fidelity release.

Fidelity recently announced zero minimums for account opening, zero investment minimums on Fidelity retail and advisor mutual funds and 529 plans, zero account fees, zero domestic money movement fees and significantly reduced index pricing. The firm also cut index mutual fund pricing by almost 50%.

In the release, Fidelity also touted its no-annual-fee 2% cash back credit card; free debit card and ATM fee reimbursement, free check writing and bill pay; free portfolio review at any Fidelity investor center; free asset allocation models for diversified and income portfolios; and transparent bond pricing at $1 per contract.

© 2018 RIJ Publishing LLC. All rights reserved.

Lincoln Financial to distribute new indexed annuity through Market Synergy Group

Posted on September 13, 2018 by -

Lincoln Financial Group is partnering with Market Synergy Group, an annuity product design firm with a network of independent insurance marketing organizations (IMOs), to launch the new Lincoln Retirement Safeguard fixed indexed annuity. The product will be exclusively through Market Synergy Group’s IMOs.

“We continue to expand distribution among independent marketing organizations,” said Tad Fifer, head of Fixed Annuity Sales and RIA Sales & Strategy at Lincoln Financial Distributors. “This new partnership with Market Synergy Group allows us to leverage their expertise in product design to offer customers a solution with accumulation potential and income protection through a leader in this distribution channel.”

Lincoln Retirement Safeguard features built-in protected lifetime income, including a benefit multiplier while saving for retirement, an option for increasing income in retirement, and an enhanced death benefit for heirs.

Lincoln Retirement Safeguard allows consumers to allocate through a combination of crediting strategies that provides conservative growth or market-driven growth, with options to reallocate every contract anniversary should their strategies change.

The solution also helps protect the client’s principal through a choice of a fixed account and four interest-crediting accounts, including the BlackRock iBLD Ascenda Index. That index gives clients global diversification through BlackRock’s iShares exchange-traded funds.

© 2018 RIJ Publishing LLC. All rights reserved.

‘Pent-up demand’ lifted annuity sales in 2Q2018

Posted on September 13, 2018 by -

Industry-wide annuity sales in the second quarter of 2018 totaled $56.0 billion, a 15.9% increase from sales of $48.3 billion during the first quarter of 2018, and a 12.3% increase over sales of $49.9 billion in the second quarter of 2017, according to a report on 2Q2018 sales by the Insured Retirement Institute, Beacon Research and Morningstar, Inc.

On a year-to-date basis, total annuity sales were $104.3 billion, a 5.8% increase of 2017 Q2 year-to-date sales of $98.6 billion.

According to Beacon Research, fixed annuity sales during the second quarter of 2018 rose to $31.9 billion, a 25.4% increase over sales of $25.4 billion during the first quarter of 2018 and a 21.8% increase over sales of $26.2 billion during the second quarter of 2017. Variable annuity total sales were $24.1 billion in the second quarter of 2018, according to Morningstar. This was a 5.2% increase from sales of $22.9 billion in the prior quarter and a 1.8% increase over sales of $23.7 billion in the second quarter of 2017.

“IRI has remained confident that annuities sales would rebound due to pent up demand for these solutions,” said IRI President and CEO Cathy Weatherford, in the release.

According to Beacon Research, fixed annuity sales strongly increased across all product types, with fixed indexed increasing sales by more than $3.0 billion in the second quarter and book value annuities rising over $2.0 billion, as compared to the first quarter of 2018. Fixed indexed annuity sales rose 20.8% to $17.7 billion from $14.6 billion in the first quarter of 2018, and 22.9% from second quarter 2017 sales of $14.4 billion.

Book value and market value adjusted (MVA) annuities, combined sales of which were $11.3 billion, rose 35.7% relative to first quarter sales of $8.4 billion, and were also up 25.6% versus second quarter 2017 sales of $9.0 billion. Income annuity sales also rose, posting sales of $2.9 billion, an 18.1% increase over first quarter income annuity sales of $2.5 billion. For the entire fixed annuity market, there were approximately $17.7 billion in qualified sales and $14.2 billion in non- qualified sales during the second quarter of 2018.

“The fixed annuity market saw record percentage increases across the board in the second quarter,” said Beacon Research CEO Jeremy Alexander, “reflecting strong demand among advisors and consumers for safety and guaranteed income.”

According to Morningstar, variable annuity net assets rose 0.7% to $1.97 trillion during the second quarter of 2018. On a year-over-year basis, assets fell 0.9%, from $1.99 trillion at the end of the second quarter of 2017, as increasingly negative net flows overcame positive market performance. Net flow in variable annuities was -$21.1 billion in the second quarter, up 14.6% from -$18.4 billion in the first quarter of 2018. Within the variable annuity market, there were $15.5 billion in qualified sales and $8.6 billion in non-qualified sales during the second quarter of 2018. Qualified sales rose 7.0% from first quarter sales of $14.5 billion, while sales of non-qualified variable annuities rose 2.2% from first quarter sales of $8.4 billion.

“While negative net flows continue to weigh on total net assets,” said Michael Manetta, Senior Quantitative Analyst at Morningstar, “it is encouraging to see a solid rebound in overall sales of variable annuities, indicating that distributors are normalizing operations in the wake of the DOL fiduciary rule being vacated.”

© 2018 RIJ Publishing LLC. All rights reserved.

Public Reactions to SEC ‘Best Interest’ Proposal

Posted on September 13, 2018 by -

Investors are confused, and may even be misled, by disclosures proposed by the Securities and Exchange Commission (SEC) to help investors choose an investment professional, according to independent testing conducted by Kleimann Communications Group on behalf of AARP, Consumer Federation of America (CFA), and the Financial Planning Coalition.

The research focuses on the Customer Relationship Summary (CRS) form, which is a central component of the SEC’s proposed “Regulation Best Interest” rulemaking package. The CRS is intended to clear up investor confusion regarding key differences between broker-dealers and investment advisers, including differences in the legal standards that apply.

In addition to AARP and CFA, the groups submitting the results to the Commission Tuesday include Financial Planning Coalition partners CFP Board, Financial Planning Association (FPA) and National Association of Personal Financial Advisors (NAPFA).

“We believe the results of this testing clearly indicate the need for the Commission to revise and retest the content, language, and format of the CRS,” the groups wrote in a letter sent to SEC Chairman Jay Clayton and members of the Commission.

The groups called on the SEC to commit to undertaking a rigorous process to revise and retest the CRS and to delay final adoption of its “Regulation Best Interest” regulatory package until it can be certain that the disclosures that form the centerpiece of that regulatory package work as intended to support informed investor decision-making.

Recognizing the important role that disclosure plays in the SEC’s proposed regulatory approach, the groups commissioned independent disclosure design experts, Kleimann Communications Group, to conduct usability testing of the CRS, using a mockup of the version for dual registrant firms developed by the SEC. The testing consisted of 90-minute, one-on-one interviews with typical investors in three demographically diverse locations.

Key Findings

Did not understand legal disclosures: Participants did not understand disclosures regarding the differing legal obligations that apply to brokerage and advisory accounts. Most participants assumed the standards would be the same despite the different language used to describe them.

“They would probably be exactly the same. If it’s an industry standard it would be standard across the board for everybody.” —St. Louis

“If there is indeed a difference in the way the law treats a broker/dealer service versus the way the law views an investment adviser firm, that difference needs to be made clear, if there is, in fact, a difference–which I do not know from these statements… The fact that they used that phrase on one side and not on the other hints at the idea that perhaps these things are legislated differently… then I want that to be spelled out very clearly.” —Philadelphia

Did not understand the term ‘fiduciary standard’: Most participants had little or no understanding of the term “fiduciary duty.” They were more comfortable with the term “best interests,” although their actual understanding of its meaning was mixed. Only a few recognized it as an obligation to put the customer’s interests first and to develop recommendations that reflect their personal goals and financial situation.

“Well, first of all, I have no idea what their fiduciary standard is.” —St. Louis

“Well, one thing, ‘fiduciary standard.’ ‘We’re held to a fiduciary standard.’ For a regular guy that punches a clock, I don’t see that word often or anything.” —Philadelphia

Think different standards meant best interest advice: Based on their understanding of the term “best interest,” some participants viewed the CRS as portraying brokerage accounts in a more favorable light than advisory accounts.

“If I’m looking at my best interest, brokerage would be better for me.” —Calabasas

“So, the obligation sounds better on the brokerage account, because it sounds like they are working on your best interests and treating you fairly . . . In the brokerage accounts, it makes it seem like they are more for you . . .” —St. Louis

Did not understand critical distinctions between different payment models, fees, and associated services: Participants struggled to articulate a clear distinction regarding the nature of services offered as part of brokerage and advisory accounts. The only feature of the accounts that was well understood by nearly all participants was the method of payment by transaction versus asset fees. But many could not translate that understanding into a determination of which model was the best match for them.

“Well, the number one key difference is [that] one is transaction-fee based and one is asset-based fee. That, I think, is the number one difference between them.” —Calabasas

“. . . They’re both saying the exact same thing. They offer advice on a regular basis, regularly monitor my account, contact by email. They’re both basically doing the same thing.” —Calabasas

Could not figure out which type of fees might cost more: Participants were deeply confused by disclosures regarding fees and costs. Both the content and the terminology in this section left participants confused and overwhelmed. They did not feel that the information provided enabled them to determine which account would cost them more.

“Once you get down to fees and costs, it’s time to stop with big sentences and start showing some figures-—as an example, here is this.” —St. Louis

“OK, but that’s very confusing. They’re saying up here asset-based fees . . . Then they go on here talking about other fees.” —Calabasas

People thought conflicts would not impact them: Most participants understood that conflicts of interest were present in both the brokerage and the advisory accounts and that these conflicts took the form of payments that created incentives to recommend certain products. However, few made a connection between the conflicts described and the possibility that they could result in recommendations that were not in their best interests.

“I’m confused by this section because I thought they were listing the conflicts of interest that they’re not allowed to do. But now that I’m reading this section, it sounds like this is what they’re allowed to do. Wow! That’s a little concerning.” —Philadelphia

“They would offer it to you at a lesser charge for the transfer or for the transaction. It seems like it is a benefit for the consumer because you are getting a better deal. Well, you are not being charged as much for the transfer or the purchase of theirs as you would something that wasn’t under their same umbrella . . . the fee would be less, I would think.” —St. Louis 002

Overwhelmingly, investors want and expect advice that’s in their best interest, regardless of any conflicts of interest.

“I know everything is about money but still, I just want to make sure it is in my best interests.” —Philadelphia

“…I don’t mind them having an incentive if it’s to my best interest too. If they’ve got my best interest at heart, then, as I said earlier, go ahead and earn as much as you can. But I don’t want you to sell me something or try and sell me something if my best interests are not at heart. If it doesn’t benefit my account and if it only benefits you, then I would take my business elsewhere.” —Calabasas 002

In short, despite favorable testing conditions that required participants to read the documents more carefully than most would on their own, few participants were able to consistently comprehend the information within a single section of the CRS. Fewer still were able to integrate and synthesize the information provided in the document as a whole.

Despite these serious shortcomings identified by the testing, the groups wrote in their letter that they “share the conclusion expressed by Kleimann Communications that a ‘usable document that communicates clearly and well with potential investors is a viable outcome.’ We offer these testing results as a first step of an iterative process designed to arrive at a final disclosure document that truly works to support an informed choice by investors between different types of accounts and different types of service providers,” they added.

The formal comment period on the SEC’s regulatory proposal ended August 7. The groups alerted the SEC in their comment letters that they were conducting the usability testing and would submit it as soon as it was available. In keeping with SEC practice, they expect the report to be made part of the public rulemaking record.

iPipeline announces annuity distribution partnership

Posted on September 13, 2018 by -

iPipeline, a provider of cloud-based software solutions for the life insurance and financial services industry, announced that its SimplyAnnuity tool, powered by the AFFIRM for Annuities order entry module, will be used by BCS Insurance Agency (BCSIA) to offer fixed and fixed indexed annuity products through Four Seasons Financial Group.

AFFIRM for Annuities is a compliance and order management system designed to integrate a carrier’s product rules with a distributor’s compliance processing requirements (customized workflows and suitability reviews) to generate transactions that are “in good order.” Compliant annuity applications are electronically submitted to carriers for processing after successfully passing all supervisory reviews.

“Our partners have traditionally sold health insurance products, [but we decided to] automate the process using SimplyAnnuity and offer fixed and fixed indexed annuities to our partners,” said Dave Burghard, President, BCSIA, in a release.

“We are now marketing to insurers to strategically expand their product offerings of life insurance and annuity products, automate the selling and buying process, and grow their revenue,” said Jim Sorebo, CEO, Four Seasons Financial. “Given the right tools and support, there is a huge, untapped opportunity to sell these simple annuity products.

BCS Insurance Agency (BCSIA) is a wholly owned subsidiary of BCS Financial Corporation (BCS). BCS has insurance licenses in all 50 states and is rated A- (Excellent) by A.M. Best.

Four Seasons Financial Group Inc. is a national wholesale provider of insurance and investments products and the technology solutions to streamline selling and buying processes to the institutional markets. FSFG works with over 250 banks and broker-dealers and over 5,000 financial advisors.

© 2018 RIJ Publishing LLC. All rights reserved.

Securian to offer “unitized model portfolios” to 401k plans

Posted on September 13, 2018 by -

Securian Financial is partnering with Mid Atlantic Capital Group to add “unitized model portfolios” to its 401(k) plan services menu as an alternative to third-party target date funds and to distinguish itself in today’s “commoditized retirement plan marketplace,” according to a Securian release.

The program will use unitized model portfolios designed by and held at Mid Atlantic Trust Company, a unit of Pittsburgh-based Mid Atlantic Capital Group. The program integrates the investment models with Securian’s recordkeeping services. Plans of any asset size can use it.

Unitized model portfolios, a relatively new development, have been described as diversified pooled investment whose value can be expressed daily in units. They enable a plan’s investment advisors to create QDIAs that are customized for a particular plan.

“Unitized model portfolios are for professionals interested in taking target-date funds to the next level by building customized risk-based solutions for participant usage,” said Kent Peterson, a retirement solutions vice president with Securian Financial, in the release.

“They provide a value proposition and competitive differentiator to retirement plan specialist advisors who focus on investments as part of their practice. Wealth management firms that, in addition to working with individual investors, offer retirement plan consulting to small businesses find unitized model portfolios particularly appealing and highly efficient.”

According to TD Ameritrade’s Unitized Managed Account publication, “The unitization process translates the value of multiple securities into a single daily unit value… UMAs allow independent Registered Investment Advisors (RIAs) to offer custom portfolio solutions to corporate retirement plan clients. By leveraging the power of model portfolios that are unitized daily, UMAs enable RIAs to deploy customized investment strategies on behalf of their plan sponsors and participants.”

© 2018 RIJ Publishing LLC. All rights reserved.

Trump’s Policies Will Displace the Dollar

Posted on September 6, 2018 by -

Back in 1965, Valéry Giscard d’Estaing, then France’s Minister of Finance, famously called the benefits that the United States reaped from the dollar’s role as the world’s main reserve currency an “exorbitant privilege.” The benefits are diminishing with the rise of the euro and China’s renminbi as competing reserve currencies. And now US President Donald Trump’s misguided trade wars and anti-Iran sanctions will accelerate the move away from the dollar.

The dollar leads all other currencies in supplying the functions of money for international transactions. It is the most important unit of account (or unit of invoicing) for international trade. It is the main medium of exchange for settling international transactions. It is the principal store of value for the world’s central banks. The Federal Reserve acts as the world’s lender of last resort, as in the 2008 financial panic, though we should recognize too that the Fed’s blunders helped to provoke the 2008 crisis. And the dollar is the key funding currency, being the major denomination for overseas borrowing by businesses and governments.

In each of these areas, the dollar punches far above America’s weight in the world economy. The US currently produces around 22% of world output measured at market prices, and around 15% in purchasing-power-parity terms. Yet the dollar accounts for half or more of cross-border invoicing, reserves, settlements, liquidity, and funding. The euro is the dollar’s main competitor, with the renminbi coming in a distant third.

The US gains three important economic benefits from the dollar’s key currency role. The first is the ability to borrow abroad in dollars. When a government borrows in a foreign currency, it can go bankrupt; that is not the case when it borrows in its own currency. More generally, the dollar’s international role enables the US Treasury to borrow with greater liquidity and lower interest rates than it otherwise could.

A second advantage lies in the business of banking: The US, and more precisely Wall Street, reaps significant income from selling banking services to the rest of the world. A third advantage lies in regulatory control: The US either directly manages or co-manages the world’s most important settlements systems, giving it an important way to monitor and limit the flow of funds related to terrorism, narco-trafficking, illegal weapons sales, tax evasion, and other illicit activities.

Yet these benefits depend on the US providing high-quality monetary services to the world. The dollar is widely used because it has been the most convenient, lowest-cost, and safest unit of account, medium of exchange, and store of value. But it is not irreplaceable. America’s monetary stewardship has stumbled badly over the years, and Trump’s misrule could hasten the end of the dollar’s predominance. Already back in the late 1960s, America’s fiscal and monetary mismanagement led to the breakdown of the dollar-based Bretton Woods pegged-exchange rate system in August 1971, when President Richard Nixon’s administration unilaterally renounced the right of foreign central banks to redeem their dollars in gold. The breakdown of the dollar-based system was followed by a decade of high inflation in the US and Europe, and then an abrupt and costly disinflation in the US in the early 1980s. The dollar turmoil was a key factor motivating Europe to embark on the path toward monetary unification in 1993, culminating in the launch of the euro in 1999.

Likewise, America’s mishandling of the Asian financial crisis in 1997 helped to convince China to begin internationalizing the renminbi. The global financial crisis in 2008, which began on Wall Street and was quickly transmitted throughout the world as interbank liquidity dried up, again nudged the world away from the dollar and toward competing currencies.

Now Trump’s misbegotten trade wars and sanctions policies will almost surely reinforce the trend. Just as Brexit is undermining the City of London, Trump’s “America First” trade and financial policies will weaken the dollar’s role and that of New York’s role as the global financial hub.

The most consequential and ill-conceived of Trump’s international economic policies are the growing trade war with China and the reimposition of sanctions vis-à-vis Iran. The trade war is a ham-fisted and nearly incoherent attempt by the Trump administration to stall China’s economic ascent by trying to stifle the country’s exports and access to Western technology. But while US tariffs and non-tariff trade barriers may dent China’s growth in the short term, they will not decisively change its long-term upward trajectory. More likely, they will bolster China’s determination to escape from its continued partial dependency on US finances and trade, and lead the Chinese authorities to double down on a military build-up, heavy investments in cutting-edge technologies, and the creation of a renminbi-based global payments system as an alternative to the dollar system.

Trump’s withdrawal from the 2015 Iran nuclear deal and the re-imposition of sanctions against the Islamic Republic could prove just as consequential in undermining the dollar’s international role. Sanctioning Iran runs directly counter to global policies toward the country. The UN Security Council voted unanimously to support the nuclear deal and restore economic relations with Iran. Other countries, led by China and the EU, will now actively pursue ways to circumvent the US sanctions, notably by working around the dollar payments system.

For example, Germany’s foreign minister, Heiko Maas, recently declared Germany’s interest in establishing a European payments system independent of the US. It is “indispensable that we strengthen European autonomy by creating payment channels that are independent of the United States, a European Monetary Fund, and an independent SWIFT system,” according to Maas. (SWIFT is the organization that manages the global messaging system for interbank transfers.)

So far, US business leaders have sided with Trump, who has showered them with corporate tax cuts and deregulation. Despite soaring budget deficits, the dollar remains strong in the short term, as the tax cuts have fueled US consumption and rising interest rates, which in turn pull in capital from abroad. Yet in a matter of several years, Trump’s profligate fiscal policies and reckless trade and sanctions policies will undermine America’s economy and the role of the dollar in global finance. How long will it be before the world’s businesses and governments are running to Shanghai rather than Wall Street to float their renminbi bonds?

© 2018 Project Syndicate.

A bit of recovery in variable annuity sales

Posted on September 6, 2018 by -

New sales of variable annuities reached $23.6 billion in the second quarter of 2018, compared with $22.4 billion in Q1 and $23.2 billion in Q2 2017. This marks the first period of positive year-on-year sales growth in nearly four years and only the second in the past six years.

Still, the pace of VA sales growth (1.6% year on year) paled in comparison to fixed-index annuities: According to LIMRA, FIA sales reached $17.6 billion in Q2 2018, up 17% from the year prior. Moreover, VAs continued to experience net outflows as policyholders continued to take withdrawals and/or annuitize their contracts.

The top three carriers in terms of sales volume—Jackson National, AXA Equitable, and TIAA-CREF—all saw sales growth slow in Q2, continuing a trend of slowing sales growth that began in mid-2017 (only Jackson has posted a quarter of positive year-on-year sales growth in the past year).

However, five of the seven remaining firms in the top 10 by sales saw double-digit sales growth in Q2, led by Prudential, which posted an impressive 35% increase in new sales year on year. These results have led to a notable shift in market share, with the top three companies accounting for 40% of VA sales versus 44% a year ago, while the next seven now account for 41% (versus 37% a year ago).

Given the heterogeneity of VA products, it is difficult to identify characteristics that may be driving sales in one direction or the other within the industry. However, there are a few patterns to note.

First, contracts that recorded positive sales growth in Q2 tended to have lower minimum fees than contracts recording negative sales growth year on year by around 5 to 15 basis points on average, depending on which subset of the universe one looks at. This appears to hold true when comparing only contract fees, contract fees plus subaccount fees, as well as living benefit fees.

Second, there is a significant difference in the number and type of optional benefits offered among the best-selling contracts, suggesting that the market for VAs (and their various benefit options) remains diverse.

Furthermore, 2012- and 2013-vintage contracts remain the best-sellers both by average sales volume and total sales volume by year. Of the top 100 selling VAs in Q2 2018, 25 were first issued in 2012 or 2013, while more than 40% of total sales volume in Q2 came from contracts of these vintages. Also, 2015 and 2016-vintage contracts sold well in Q2, while 2017-18 vintages were somewhat less popular.

That somewhat older vintages are dominating VA sales may reflect changes in how VAs are sold. Independent advisors accounted for more than 42% of all VA sales in Q2 2018, up from 36% a year earlier and 38% in Q1.

Meanwhile, captive agency sales have declined to less than 30% from 37% in the past year. Independent advisors may be more comfortable offering established products to their clients, possibly explaining the popularity of 2012-13 vintage VAs.

© 2018 Morningstar, Inc.