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Fidelity extends ESG lineup

Posted on July 5, 2018 by Editorial Staff -

Fidelity Investments has added a Fidelity Sustainability Bond Index Fund to its lineup of sustainability-focused index funds. Alongside the existing U.S. Sustainability Index Fund and International Sustainability Index Fund, Fidelity now offers environmental, social and governance (ESG) index mutual funds in every major asset class.

The new sustainability bond index fund is available directly to individual investors, third-party financial advisors and workplace retirement plans. The share classes are offered at total net expense ratios of 20 basis points a year for the Investor Class, 13 basis points for the Premium Class and 10 basis points for the Institutional Class.

In addition to those three sustainability index funds, Fidelity’s ESG investment offerings include an actively managed mutual fund (Fidelity Select Environment & Alternative Energy Portfolio) and Fidelity’s FundsNetwork program, which provides access to more than 100 ESG funds.

Of the more than $285 billion invested in ESG mutual funds and ETFs1 in the US, approximately $25 billion are under administration on Fidelity’s platform. Eighty-six percent of Millennials express interest in sustainable investing and 90% say they would choose a sustainable investment as a 401(k) plan option, Fidelity said in a release.

In addition to launching the Fidelity U.S. Sustainability Index Fund and Fidelity International Sustainability Index Fund in 2017, Fidelity also became a signatory of the United Nations-supported Principles for Responsible Investment (PRI) and created an ESG Office in its Asset Management division to further the integration of ESG considerations into investing practices.

Asset managers tweak their value proposition: Cerulli

Posted on July 5, 2018 by Editorial Staff -

Asset managers have responded to accelerating fee compression by offering technology platforms and asset allocation advice, according to Cerulli Associates, a global research and consulting firm.

“There are multiple causes of fee compression in asset management, which compound upon each other to prompt industry change,” said Bing Waldert, director at Cerulli, in a press release. “For example, greater regulation has formalized the buying process and created demand for low-cost passive products.

“Under the influence of professional buyers, eliminating the highest-priced products is often the first screen, creating a race to the bottom as managers try to avoid having above-average fees,” he added.

Fueling the decline in asset management fees: the increasing importance of asset allocation advice.

“In some cases, asset managers are dropping fees on asset management products to near zero, instead choosing to charge for asset allocation, a task traditionally performed by the wealth manager,” Waldert said.

“The growth of asset allocation advice demonstrates how asset and wealth managers are using these industry trends to enter each other’s value chains and attempt to capture a greater share of a shrinking fee pool.”

Cerulli expects that automation will continue to compress overall fees in wealth management. “Automation will lower the cost of transactions, bringing down fees in wealth management,” said Waldert. “In addition, digital advice platforms emphasize asset allocation, which pressures fees in individual asset manager products and benefits exchange-traded funds (ETFs).”

These findings and more are from the July 2018 issue of The Cerulli Edge–U.S. Asset and Wealth Management Edition, which provides insight into the drivers of fee compression, analyzes evolving advisor pricing models, and explores saturation in the ETF market.

Ascensus to buy INTAC, a third-party administrator

Posted on July 5, 2018 by Editorial Staff -

Ascensus, the 401(k) recordkeeper and benefits administrator that handles Vanguard’s small-plan 401(k) business, has agreed to buy INTAC Actuarial Services, Inc., a third-party administration (TPA) firm. Based in Ridgewood, NJ, INTAC will become part of Ascensus’ TPA Solutions division.

INTAC administers employer-sponsored retirement plans for about 3,000 small to mid-sized companies, their owners, key executives and employees. INTAC also provides ongoing education to their clients and the professionals in the communities they service to ensure that they remain abreast of industry changes and issues.

“The tri-state [New Jersey, New York and Pennsylvania] and greater Delaware areas are important market expansion opportunities for our TPA Solutions division,” says Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A. “With its strong historical growth, successful long-term track record, and associate-focused culture, INTAC is an ideal business to help Ascensus achieve its immediate and long-term growth plans.”
Ascensus, based in Dresher, PA, supports more than 60,000 retirement plans, more than four million 529 education savings accounts, and a growing number of ABLE savings accounts. It also administers more than 1.6 million IRAs and health savings accounts. As of March 31, 2018, Ascensus had over $187 billion in total assets under administration.

My Encounter with CFPs Who Like Annuities

Posted on July 5, 2018 by Kerry Pechter -

The other night I pondered a familiar puzzle: Why aren’t advisors more receptive to annuities and annuity wholesalers, especially at a time when so many of their older clients are transitioning into the “risk-off” side of their financial lives?

This question troubles annuity issuers. At a conference this past spring, one national sales manager broached this topic during a closed-door breakout session. His audience laughed several times—at themselves—as he warned them about words not to use with advisers.

“Never talk about your product,” he said. “Advisors don’t think of themselves being in the product business. They offer advice, not products. And never, ever refer to a product’s death benefit. Your typical advisor doesn’t see any ‘benefit’ in ‘death.’”

A cat’s paw of chagrined laughter rippled over the surface of the small audience in the carpeted hotel meeting room at the center of our conflicted capitol city.

Here’s my take: Advisors are essentially risk buyers. Taking on market risk, everyone knows, is how you capture reward (potentially) in the investing game. To maximize rewards, risk-buyers like to pay as little as possible for risk (hence index funds and exchange-traded funds or ETFs). If they want to moderate their clients’ risk, they use diversification.

Enter the annuity wholesaler on his appointed rounds. The wholesaler’s company, like the advisor, is a risk buyer. (Or, if you prefer, a seller of protection.) Like the adviser, the company wants to pay as little as possible for risk (i.e., wants to promise as small a benefit as he or she can get away with).

And, like the advisor, he’s selling a form of advice; all but the simplest annuities have a strategy baked into them that makes the advisor’s role a bit redundant. (Hence the debate over whether advisors should extend their wrap fees to include clients’ annuity assets.)

Is it a mystery that when two risk-buyers and advice-sellers get together, they don’t have much to trade? This is a case of ram-meets-ram, not ram-meets-ewe. It’s a scenario for polite head butting.

In response, annuity issuers and wholesalers have positioned themselves, at least in part, as risk sellers. They’ve included equity options and mutual funds in their products to offer risk exposure in tandem with the products’ risk-reducing guarantees.

To put it another way, they’ve added an element of greed to their accustomed fear-story. But the mixture has a way of confusing the advisor. An insurance product’s costs inevitably seem too high and its upside potential too low to appeal to risk-buyer. Rather than coming across a “the best of both worlds,” an insurance product can easily look like the “worst of both worlds” to a risk-pursuing advisor.

The most receptive advisors

The advisors most likely to be receptive to this pitch are those who at one time sold insurance. In May, I was invited to give a 50-minute talk about annuities at the New Jersey Financial Planning Association’s spring conference. Going into it, I was nervous. I’m no Michael Kitces when it comes to public speaking. And I assumed that the advisors would be averse to annuities.

So, expecting a small, hostile audience for the breakout session, I prepared a presentation that was somewhat defensive—in the apologetic rather than antagonistic sense of that word. But I assumed wrong.

First of all, the repurposed banquet room at the APA Hotel, nestled amid the concrete cloverleafs of eastern New Jersey, became quite crowded. And, to my surprise, when I asked for a show of hands from people who regularly sold annuities, dozens of palms appeared.

How many of you have sold single premium immediate annuities? I asked. Just a couple of hands went up. I then asked who sold variable annuities. A few more hands went up. When I asked who sold indexed annuities, the response felt almost unanimously to be yea.

It turned out that many of these FPA member were, aside from being CFPs (Certified Financial Planners), were also registered investment advisers and licensed insurance agents. They could give any kind of advice and sell almost anything to anybody, and apparently they do.

Although I have no proof of this, it seems self-evident that advisors who have insurance somewhere in their DNA—who sold insurance early in their careers—will be much more receptive to selling annuities later in life, as they mature and evolve into dually-licensed fee-based advisors, than advisors who never sold insurance.

As a rule, I suppose that people who came up through the pure securities brokerage or the wirehouse world and have been regulated only by the SEC would be much lower-percentage prospects for annuities, unless one of their clients needed a variable annuity for extra tax-deferral.

That is not to say that advisors who like annuities are any less opportunistic about exploiting market inefficiencies than their insurance-shunning brethren. At the NJFPA meeting, I told them something that advisors had said to me at a group dinner one night during a conference.

“What do you think will be the next big product idea in annuities?” one advisor at the table asked me. While I was trying to formulate an answer, another advisor said, “Just tell me what product an actuary will get fired for three years from now.” I had a good laugh from that comment. So did the advisors I shared it with in New Jersey.

Fuzzy Words in a Retirement Bill

Posted on July 5, 2018 by Kerry Pechter -

Skopos Labs, a Manhattan-based machine-learning firm, gives the Retirement Enhancement and Savings Act (RESA) a 24% shot at approval by the U.S. House of Representatives and an 18% chance of becoming law. The firm also assigns RESA a “significance score” of 7 out of 10: it could shake up the retirement industry.

Eighteen percent is far from a guarantee, especially in these distracted times. But that’s 4.5 times as likely to be enacted as the average bill. RESA has Republican sponsors (a big plus) in both the Senate (where it originated) and the House. The Senate Finance Committee approved it with a 26-0 bipartisan vote in 2016. It was reintroduced in both houses this year.

RESA contains a bunch of provisions intended to promote retirement savings in the US. Topping its wish list is a revision of current pension law to allow a large number of unrelated employers to join a single “pooled employer plan” run by a “pooled plan provider” (PPP).

Depending on how you interpret RESA and America’s other pension laws and regulations (embodied by the Employer Retirement Income Security Act of 1974), RESA might allow plan service providers to, in effect, sponsor 401(k) plans and then recruit many small and mid-sized employers to join in what would be a single plan.

Current law doesn’t allow this. To be sure, plan advisors and third-party administrators routinely sell packaged 401(k) plans to small employers. Similarly, firms like Ascensus Betterment offer near-identical plans to many small employers. But, in those cases, each employer sponsors its own plan. RESA could, for the first time, let providers create single plans for multiple employers and their employees.

Would RESA do that? The language of the bill doesn’t explicitly say so. Such vagueness is confusing to 401(k) experts. On its face, the bill encourages small employers to band together to create multiple employer plans and then hire service providers to handle the chores. But there’s no evidence that small employers have lobbied for that.

Indeed, the reverse is more likely. RIJ’s interviews with retirement experts indicate that, if enacted, the bill might allow 401(k) service providers to set up plans and invite small employers to join. This would create economies of scale for both small employers and large providers that are currently absent in the market place–and perhaps lead to broader 401(k) availability in small companies. But, again, the bill doesn’t explicitly enable provider-driven plans.

A close look at RESA

What does RESA say, exactly? Among other things, RESA explicitly:

¶ Creates a new class of defined 401(k) contribution plans or a collection of IRAs called pooled employer plans (PEPs) that uses a pooled plan provider (PPP). “A PEP is to be treated as a single plan where ERISA Section 210(a) applies – a multiple employer plan,” said Jack Towarnicky, executive director of the Plan Sponsor Council of America in an email to RIJ.

¶ Removes the existing “commonality” requirement. In a PEP, the employers could be unrelated. That’s new. “Pooled employer plan does not include a plan with respect to which all the participating employers have both a common interest other than having adopted the plan and control of the plan,” said an official report on RESA in 2016.

¶ Removes the “one bad apple” rule. The acts of one negligent employer couldn’t ruin the PEP for the other participating employers. That too is new. “The provision provides relief from disqualification (or other loss of tax-favored status) of the entire plan merely because one or more participating employers fail to take actions required with respect to the plan,” said the same report.

¶ Allows for simplified reporting and audit relief by employers. A provider could file a single Form 5500 on behalf of all the participating employers. A PEP with fewer than 1,000 participants where no employer had 100 or more participants wouldn’t be subject to DOL audit.

Who can be a plan sponsor?

Does RESA as currently written open the door to industry-sponsored workplace retirement plans–plans in which the employer’s fiduciary role would be limited to choosing and monitoring the providers? The answer seems to be either no or maybe. On the other hand, 401(k) plans, like annuities, are typical sold, not bought. So the question might be semantic or legally moot.

Pete Swisher, national sales manager at Pentegra Retirement Services and author of “401(k) Fiduciary Governance: An Advisor’s Guide,” grapples with this issue in an open letter to clients last month. He wrote:

“There is no evidence [that service providers will be able to sponsor their own PEPs–perhaps this will end up being true, but there is no evidence of it in the Bill. The Bill could have, for example, amended ERISA Sections 3(5) and/or 3(16)(B), the definitions of “employer” and “plan sponsor,” but does not do so.”

In an interview this week, Swisher told RIJ, “If the question is, ‘Can a provider sponsor its own MEP and provide a variety of services to employers?, that’s a difficult construction. There’s nothing in current law and nothing in RESA to permit it,” he said.

“But there is a path there. A service provider could be the provider and the sponsor if an outside party were hired as the independent fiduciary. There’s history there. Someone unrelated to the service provider and drawing no more than 2% to 5% of his income from that business, maybe a law firm, could hire somebody to do that,” Swisher added.

“Then a Vanguard or a Fidelity could be appointed [to run the plan]. But it’s difficult to come up with that construction, and it wouldn’t succeed at the beginning.”

Jack Towarnicky, executive director of the Plan Sponsor Council of America, told RIJ that the RESA removes the “lack of commonality” obstacle that caused the DOL to disapprove of provider-sponsored multiple employer plans—which Towarnicky calls “sponsored MEPs”—in 2012. But it doesn’t eliminate every obstacle.

“A sponsored MEPs is not possible today,” Towarnicky told RIJ in a recent email. “However, I believe the [regulatory] agencies might favorably receive proposals to create a ‘sponsored MEP’ as consistent with DOL interpretive bulletin guidance regarding state-sponsored MEPs.

That bulletin, published in the Federal Register in late 2015, acknowledged the benefits of PEPs that state legislatures might sponsor (as Vermont has done). But the bulletin, written by Phyllis Borzi, head of the DOL’s Employee Benefit Security Administration under President Obama, specifies that state sponsorship fits within current law in a way that provider sponsorship doesn’t.

“In the Department’s view, a state has a unique representational interest in the health and welfare of its citizens that connects it to the in-state employers that choose to participate in the state MEP and their employees, such that the state should be considered to act indirectly in the interest of the participating employers.

“Having this unique nexus distinguishes the state MEP from other business enterprises that underwrite benefits or provide administrative services to several unrelated employers.” But that was then. Borzi’s successor in the Trump DOL is Preston Rutledge, the Senate Finance Committee lawyer who is widely credited with having drafted RESA in 2016 for its initial sponsor, Sen. Orrin Hatch.

Next in our series: The companies that are leading the RESA campaign.

Misperception in UK: Auto-enrollment means adequacy

Posted on July 5, 2018 by Editorial Staff -

Tens of millions of Britons aren’t saving enough for retirement while millions more mistakenly assume that auto-enrollment assures them of a comfortable retirement, the UK Pensions and Lifetime Savings Association (PLSA) has warned. The news was reported by IPE.com.

The PLSA issued a report this week revealing that 80% of people are not sure they are saving enough for retirement. The report was based on opinions gathered from policy makers, product providers and the general public gathered over a three-month period.

Under the terms of the current auto-enrollment system, the employee pays in a minimum of 3% of their salary, while the employer pitches in 2%. That is set to rise to a total of 8% in April 2019, of which at least 3% must be covered by the employer.

More than half (51%) of those surveyed told the PLSA they thought this arrangement would furnish them with the UK government’s “recommended amount” of retirement savings.

Since auto-enrollment was introduced in the UK, almost 10 million new savers have entered the pensions market, according to the Office for National Statistics.

However, the PLSA said a simple increase in participation was not enough. In its report – Hitting the Target: A Vision For Retirement Income – the organization made five key recommendations:

Introduce savings targets and increase engagement
2. Increase pension savings
3. Increase support at retirement
4. Make it easier to use other income sources
Improve how pension schemes are run

In terms of the proposal to increase the level of overall saving, the PLSA proposed increasing the minimum contribution level for auto-enrolment from 8% to 12% of overall salary between 2025 and 2030.

“Millions of savers are confused about whether they’re on track for the lifestyle they want in retirement,” said Nigel Peaple, director of policy and research at the PLSA.

“We believe that a simple and widely promoted system of retirement income targets would make it much easier for savers to know whether they are saving the right amount.”

The PLSA’s proposals were widely approved by the pensions industry.

“While auto-enrolment has been a real game changer for millions of people across the UK, most people still aren’t saving enough to live comfortably in retirement,” said Andy Tarrant, head of policy at The People’s Pension.

“The PLSA’s saving targets will help people to judge more accurately how much they need to save…and [the organization’s] roadmap is an important contribution as to how the can most effectively be done.”

Tarrant’s comments were echoed by Simon Chinnery, head of defined contribution (DC) client solutions at Legal & General Investment Management.

“Introducing new retirement income targets are an excellent start and moves us away from terms such as ‘good outcomes’ to providing members with the tools to know that this aspiration can be achieved,” he said.

However, NOW: Pensions noted that UK employers bore less of the pensions burden than in other countries that have nationwide auto-enrollment or DC schemes.

According to a survey conducted by the Pensions Policy Institute, commissioned by NOW: Pensions, UK employers will be responsible for 37.5% of the contribution burden, compared with 84.8% in Italy, 66.7% in Denmark and at least 50% in Japan.

“As auto-enrollment minimum contributions increase, employees will find themselves bearing more of the burden than their employer and this inequality doesn’t feel right,” said Troy Clutterbuck, CEO of NOW.

“The employer contribution is the main selling point for workplace pensions over the long term. Rebalancing contributions would almost certainly help minimize opt-outs.”

Everybody into the Pool?

Posted on June 28, 2018 by Kerry Pechter -

Imagine a future where employees from many different companies belong to a tax-deferred, auto-enrolled defined contribution savings plan at work whose sponsor is not an employer or an employees’ union but by a plan recordkeeper or asset manager or retirement plan consultant.

We’re talking here about “open MEPs” (open multiple employer plans) or “PEPs” (pooled employer plans). These would be omnibus DC plans that many small employers (or even many mid-size or large employers) without any “commonality,” such as a shared union, could join.

In a series of stories in coming weeks, we’ll explore this topic. There’s some suspense and uncertainty surrounding these plans. That’s partly because new federal legislation that would enable has stalled, despite lobbying by asset managers, as represented by the Defined Contribution Institutional Investors Association (DCIIA).

There’s also a fair amount of conflicting information about MEPS. For instance, the Retirement Enhancement and Savings Act of 2018 (RESA), which would remove existing legal obstacles to these plans, states that “multiple employer plans (MEPS) provide an opportunity for small employers to band together to obtain more favorable pension investment results and more efficient and less expensive management services.”

But, as you’ll hear below, that’s not how plans would work. The law would enable DC plan service providers to sponsor 401(k) plans and then invite employers to join. Importantly, employers would have fewer administrative chores, expenses and legal liabilities than they do when they sponsor a 401(k) plan themselves.

There’s also some confusion over the acronyms used to describe these plans. In RESA (there are House and Senate versions), these plans are called MEPS. But the same acronym is also used to describe union-sponsored defined benefit (DB) plans, a dying concept. Many of those plans are currently underfunded and may eventually need a federal bailout.

To distinguish between the two acronyms, defined benefit MEPS are referred to as “closed multiemployer plans.” Closed, in this context, means that only employers with
“commonality”—like being in the candy industry and employing members of a confectionary workers union—can join. The new MEPS are “open multiple employer plans.” Almost any employer could join one.

In addition, there’s some uncertainty about what these new provider-sponsored plans would accomplish. The Defined Contribution Investment Industry Association positions them as a partial remedy for the fact that tens of millions of small company employees don’t have access to a savings plan at work, a problem known as the “coverage gap.”

Currently, big asset managers say that the balances in small plans are too low and too widely dispersed to be financially attractive to manage. But that might change, it’s often said, if they could pool the assets of tens or hundreds of small or mid-sized companies.

RIJ will look more closely into all of these issues, including the success of a similar concept, call master trusts, in Britain. In this initial installment, we’ll clarify the source of the push for open multiple employer plans.

Industry-driven

Open MEPS are almost uniformly described as a path for small employers, with or without 401(k) plans at present, to collaborate and purchase retirement plan services more cheaply in bulk—the way 100 unaffiliated grocers in New York and Connecticut banded together in 1926 to create the Independent Grocers Association (IGA) to buy groceries in bulk.

“The question is, ‘Will [open MEPS] be employer-driven or will it be provider driven?’ and I think that it’s clearly going to be the latter,” said Seth Harris, a former Deputy and Acting Secretary of Labor in the Obama Administration, speaking at a recent Insured Retirement Industry conference.

“Smart third-party providers will come together and market plans to small and mid-sized companies to convince them to participate in their plans,” Harris told RIJ. “If we were going to see the first model, the employer-driven model, we would have already seen it. That’s not what’s happening now.”

Brad Campbell, a former head of the Department of Labor’s Employee Benefit Security Administration, agreed with Harris. “It will be provider driven,” he told RIJ. “I also think that open MEPs are a far better solution to the coverage problem than the state-based programs, which offer smaller opportunities for savers and which are prone to abuse by the states.” But Campbell said he doubted that getting RESA passed will be easy.

Steve Saxon, a pensions expert at the Groom Law Group in Washington, D.C., told RIJ, “I agree that the open MEP phenomenon will be service provider driven. And I think that within two years after this thing passes you’ll see enforcement initiatives at the Department of Labor.”

Expanding on that point, he added, “There will be abuses in this space by conniving service providers who take advantage of small employers. The potential abuses are that (1) nobody is monitoring the plan administrator and (2) the fees paid for administration are too high. Both of these can be addressed by making sure the employers that participate in the MEP are made responsible for paying attention to these two things.”

The precise amount of responsibility that employers would have in an open MEP is one of the issues we’ll address in future installments of this series.

Next installment: The federal legislation that would make open MEPS possible.

JENGA as a Financial Metaphor

Posted on June 28, 2018 by Kerry Pechter -

Watching the Fed raise interest rates a little bit at a time reminds me of the classic family game of Jenga, where players remove a block at a time from a tower of 54 wooden blocks. A similar kind of suspense is involved, I guess.

Back in 2005 and 2006, I remember watching Alan Greenspan raise rates a quarter point at a time and thinking, ‘If this guy can get us back to a normal yield curve without crashing the stock market, he’ll deserve the Nobel Prize.’ (Or maybe I didn’t think that; maybe I’m suffering from hindsight bias.)

We know how that ended. And we know from handwringing press reports this week that Fed tightening and flat yield curves (defined as a narrow spread between 2-year and 10-year rates) are very often harbingers of recessions.

When a highly leveraged system encounters rising rates, bad things can happen. The more leveraged you are, the less you can afford an increase in your financing costs or a decline in the value of your collateral. Leverage in the system can be like high blood pressure: You don’t know how high it is until you have a stroke.

Peaks in margin debt sometimes presage a stock market crash. According to Yardeni Research, margin debt reached at all time high this week of about $650 billion. That sounds bad. Before the financial crisis of 2008, it peaked between $400 and $450 billion.

But as a percentage of the value of the Wilshire 5000 equity index, margin debt is lower today than ten years ago: about 2.4% (down from a spike of more than 2.8%). And it’s moving sideways, not spiking. That doesn’t sound as ominous.

To understand all this, you have to grasp fixed income at a deep level. Sometimes, when contemplating bonds, I feel like I’m walking in a mental Möbius strip. Joan, a former co-worker of mine at Vanguard, used to say that you’re either born with the “bond gene” or not. Difficulty with bonds, she believed, isn’t density. It’s destiny.

As a consumer, I’ve benefited from low rates over the past 10 years. A few years ago, a mortgage refinance helped us replace our old kitchen’s turquoise appliances and mock-Tudor cabinets with pale wood and stainless steel. But, inconsistently, I’ve also hoped that long-term rates would rise, helping savers and annuity issuers.

Ten-year rates have been rising, but not as fast as short-term rates. Exactly two years ago, the 10-year Treasury yielded 1.46%. Yesterday, that number was 2.84%. But in the last two years, the one-month yield has risen to 1.79% from just 0.25%. So we have a flattening yield curve.

A flat yield curve can become an inverted yield, where long-term bonds are paying lower yields than short-term bonds, despite their higher interest-rate risk. That’s considered a possible leading indicator of recession. But we’re nowhere near the kind of inverted yield curve that occurred before the 2008 recession.

Scrolling through the Treasury Department’s pre-crash interest rate data, I found some very strange numbers this week. On January 22, 2005, the one-month government yield was 1.89%, the two-year yield was 3.21% and the 10-year yield was 4.20%. That sounds healthy, right? But by February 1, 2006, when Ben Bernanke succeeded Alan Greenspan as Fed chairman, the one-month rate was 4.33%, the two-year rate was 4.59% and the 10-year rate was 4.57%. Talk about inversion.

It got worse. A year later, on February 21, 2007, the one-month rate was 5.27%, the 2-year was 4.82% and the 10-year was 4.69%. (That sounds bizarre. On the other hand, the yield curve was similarly shaped during the middle of the dot.com boom ten years earlier.) Bernanke must have been worried about inflation in 2007: the Consumer Price Index spiked at just above 4%.

Back to the present: The Fed could presumably push up longer-term rates and steepen the yield curve by selling some of the dodgy fixed income instruments it bought during its Quantitative Easing period, when ended in 2016. But there has been no indication of that. In January 2015, the Fed’s assets totaled $4.516 trillion. Last week, that number was $4.316 trillion, a drop of just 4.4%.

Putting a lot of long-term assets on the market could also kick off an undesirable chain reaction. By increasing the supply of long-term assets relative to demand, it would reduce the prices of existing bonds. That could create the equivalent of margin calls on bonds used as collateral and raise the payments of borrowers who planned to roll over their debts or refinance. A vicious cycle could lead to further sell-offs and then to you-know-what.

Jenga!

Data Connection

Posted on June 28, 2018 by No Author -

The Rising Tide of Corporate Debt

Posted on June 28, 2018 by Susan Lund -

Is growing corporate debt a bubble waiting to burst? In the ten years since the global financial crisis, the debt held by nonfinancial corporations has grown by $29 trillion—almost as much as government debt—according to new research by the McKinsey Global Institute. A market correction is likely in store.

Yet the growth of corporate debt is not as ominous as it first appears—and, indeed, in some ways even points to a positive economic outcome.

Over the past decade, the corporate-bond market has surged as banks have restructured and repaired their balance sheets. Since 2007, the value of corporate bonds outstanding from nonfinancial companies has nearly tripled—to $11.7 trillion—and their share of global GDP has doubled. Traditionally, the corporate-bond market was centered in the United States, but now companies from around the world have joined in.

The broad shift to bond financing is a welcome development. Debt capital markets provide an important asset class for institutional investors, and give large corporations an alternative to bank loans. Yet it is also clear that many higher-risk borrowers have tapped the bond market in the years of ultra-cheap credit. Over the next five years, a record $1.5 trillion worth of nonfinancial corporate bonds will mature each year; as some companies struggle to repay, defaults will most likely rise.

The average quality of borrowers has declined. In the US, 22% of nonfinancial corporate debt outstanding comprises “junk” bonds from speculative-grade issuers, and another 40% are rated BBB, just one notch above junk. In other words, nearly two-thirds of bonds are from companies at a higher risk of default, including many US retailers. These businesses have a lot of speculative-grade debt coming due over the next five years, and for many the math simply will not add up, owing to declining sales as shoppers go online.

Source: McKinley Global Institute, 2018.

Another potential source of vulnerability is soaring corporate debt in developing countries, which have accounted for two-thirds of overall corporate-debt growth since 2007. In the past, advanced-economy firms were the largest borrowers. But much has changed with the rise of China, which is now one of the largest corporate-bond markets in the world. Between 2007 and the end of 2017, the value of Chinese nonfinancial corporate bonds outstanding increased from just $69 billion to $2 trillion.

One final source of risk is the fragile finances of some bond-issuing companies. To be sure, MGI finds that in advanced economies, less than 10% of bonds would be at higher risk of default if interest rates were to rise by 200 basis points. Similarly, in Europe, the share of bonds issued by at-risk companies is currently less than 5% in most countries, indicating that only the largest blue-chip companies have issued bonds so far.

The problem is that there are pockets of vulnerability. Even at historically low interest rates (before the US Federal Reserve raised its benchmark rate to 1.75-2% on June 14), 18% of bonds (worth roughly $104 billion) outstanding in the US energy sector were at higher risk of default.

Still, the biggest risks appear to be in emerging markets such as China, India, and Brazil. Already, 25% to 30% of bonds in these markets have been issued by companies at a higher risk of default (defined as having an interest-coverage ratio of less than 1.5). And that share could increase to 40% if interest rates were to rise by 200 basis points.

Within these emerging markets, some sectors are more vulnerable than others. In China, one-third of bonds issued by industrial companies, and 28% of those issued by real-estate companies, are at a higher risk of default. Corporate defaults are already creeping upward in China; and in Brazil, one-quarter of all corporate bonds at a higher risk of default are in the industrial sector.

With the global corporate default rate already above its 30-year average and likely to rise further as more bonds come due, is the next global financial crisis at hand? The short answer is no. While individual investors in bonds may face losses, defaults in the corporate-bond market are unlikely to have significant ripple effects across the system, as the securitized subprime mortgages that sparked the last financial crisis did.

Beyond the near-term bumps in the road, the shift to bond financing by companies is a positive development. There is plenty of room for further sustainable growth. But as the market grows, banks will need to rethink their strategies focusing more on other customer segments, such as small and medium-size businesses and households. Investors and individual savers, for their part, will have new opportunities for portfolio diversification.

But if the financial crisis ten years ago taught us anything, it is that risks often emerge where they are least expected. That is why regulators and policymakers should continue to monitor existing and potential risks, such as those arising from

credit default swaps on corporate borrowers or complex securitization of bonds. They should also welcome the establishment of electronic platforms for selling and trading corporate bonds, to create more transparency and efficiency in the marketplace. That way, today’s debt would be less likely to become tomorrow’s debt overhang.

Over half of today’s retirees have pensions

Posted on June 28, 2018 by Editorial Staff -

The debate over whether there’s a retirement crisis in the U.S. seesaws back and forth. Those who follow the debate see conflicting data, often averages or median, that doesn’t add up to a clear picture. On one day, we read that many retirees can afford not to dip into savings until age 71. Then we read that millions of Americans have no retirement savings at all.

In truth, Americans do vary widely in retirement funding, just as they differ dramatically in terms of income, wealth and education. In May, the Federal Reserve published a document called Report on Economic Well-Being of U.S. Households in 2017. Only a small final section of the report is dedicated to retirement financing per se. But it has some useful data in it.

The report confirms, for instance, that despite the rapid decline in defined benefit plan coverage in recent decades, especially in the private sector, a large percentage of current retirees have some income from public or corporate DB plans. According to the report, 56% of U.S. retirees have income from a DB plan (58% of whites, 57% of African Americans and 48% of Latinos).

The persistent presence of DB coverage, coupled with widespread Social Security coverage (89% of whites, 83% of blacks but only 73% of Latinos), could have a crowding out effect on the demand for personal, privately purchased annuities as a source of guaranteed income in retirement.

Despite recent news about the rising percentage of older Americans in the workforce—and despite the frequently heard complaint, “I’ll never be able to retire”—Americans tend to retire earlier rather than later, the data shows. Half of retirees retired before age 62 in 2017, according to the report. An additional one-fourth of those who retired were between ages 62 and 64.

But the report also confirms the conventional wisdom that many Americans don’t retire by choice, but by necessity or perceived necessity. More than half of black and Hispanic Americans (58% and 55%) retired before age 62, compared to 48% for whites. Whites were most likely to retire because they “wanted to do other things.” Blacks were most likely to retire because of poor health, and Hispanics were most likely to retire because of family responsibilities.

As for the future, the data suggests that tomorrow’s retirees will be less ready for retirement than today’s retirees. Only 26% of non-retirees have a DB pension, 45% do not have defined contribution plan savings, 57% have no savings outside of a retirement account, and 68% have no IRA. Many of those are under age 40 and may still catch up, however. Eighty-seven percent of non-retirees age 50 and over say they have at least some retirement savings.

Honorable Mention

Posted on June 28, 2018 by Editorial Staff -

OneAmerica names McCarthy to head Retirement Services

OneAmerica today announced the hiring of Sandy McCarthy as president of Retirement Services. McCarthy held previous management positions at Mercer, ING (now Voya) and CitiStreet.

Most recently, McCarthy served as Mercer’s North America Region Benefits Administration Business Leader, representing $71 billion in assets under administration and 4 million participants, following positions in global client management and Asia Pacific Outsourcing Business Leader/CEO while living in Australia, where she led a workforce of 1,400.

Before joining Mercer, McCarthy was a 14-year contributor at ING (now Voya) and its legacy companies, serving as president, Institutional Plan Services. Prior to the acquisition of CitiStreet by ING in 2008, she served as president and board member of CitiStreet, LLC, representing $265 billion assets under administration, over 11 million participants and a workforce of about 3,600.

Other past leadership positions also include service with Fidelity Investments, Bank of America and State Street. McCarthy graduated with honors from Tufts University, earning both her undergraduate in sociology/education and Master of Arts degree in education, then completing an MBA from the Fuqua School of Business at Duke University.

Principal Financial offers new retirement plan services for small and mid-sized businesses

To help small- and medium-sized businesses and tax-exempt organizations offer flexible retirement benefits to employees. Principal Financial Group today launched two retirement plan packages as part of its Principal Flex solution.

Designed for companies with under $1 million in plan assets and 500 or fewer employees, the two packages include these advisor benefits:

Easy-to-estimate baseline costs, with fewer inputs
Investment options that fit the SMB client
An expense collection option that helps clients budget for plan costs
Transparent cost structure
Compensation flexibility for plan advisors

Principal serves more than 37,000 SMB clients with nearly 1.3 million participants, according to Kevin Morris, vice president and Chief Marketing Officer, Retirement and Income Solutions at Principal. Only about 53% of businesses with fewer than 100 employees offer retirement plans, a Principal release said.
Depending on the Principal Flex package selected, advisors can leverage several advantages for employer clients including offsetting administrative costs, tax saving strategies and paperwork reduction. Principal Flex packages also offers participant services and additional customizable plan features typically enjoyed by larger organizations.

Executive moves at Northwestern Mutual

Northwestern Mutual today announced the promotions and appointments of several leaders to help advance the company’s strategy and transformation agenda.

John Schlifske, chairman and chief executive officer.

The following leaders are being promoted and/or named to new roles:

Tim Gerend, senior vice president-career distribution, now leads the following departments: distribution performance and development, field strategy and integration, planning and sales, and field rewards. He replaces Greg Oberland, executive vice president and company president, who will retire this year.
Aditi Gokhale has been promoted to senior vice president in addition to being chief marketing officer.
Christian Mitchell has been promoted to senior vice president-investment products & services in addition to serving as chief executive officer of Northwestern Mutual Wealth Management Company.
Beth Rodenhuis, senior vice president, has also been named chief transformation officer, continuing to oversee corporate strategy and the company’s transformation office.
Emilia Sherifova has been promoted to senior vice president and chief technology officer, the first woman to hold this position at Northwestern Mutual.
Alexa von Tobel has been promoted to senior vice president and chief innovation officer for Northwestern Mutual in addition to serving as chief executive officer of LearnVest.

These leaders will be become part of the company’s expanded senior leadership team, responsible for overseeing Northwestern Mutual’s strategy, execution and operations. The changes in roles and responsibilities will begin taking effect July 1 and continue through the end of August.

Lincoln Financial extends services to RIAs at Orion

Lincoln Financial Group has announced a strategic partnership with Orion Advisor Services, LLC, a portfolio management solution provider for registered investment advisors, to offer a data platform for advisors who use Lincoln Financial’s variable and fixed annuity solutions.

The new relationship with Orion is part of a series of technology integration enhancements Lincoln is making in 2018 to bolster its presence among registered investment advisors, according to a release this week.

Fee-only advisors using the Orion platform will have access to fee billing and analysis tools, along with a data feed directly from Lincoln, enabling advisors to include low-cost annuity solutions in their client portfolios.

Americans have $100 trillion in wealth and $15.7 trillion in debt

Posted on June 28, 2018 by Editorial Staff -

American household net worth has just surpassed $100 trillion for the first time, and total household debt (mortgage and consumer debt) is about $15.7 trillion. Since the 2008 financial crisis, home equity has rebounded smartly (good for Boomers) but student loan debt has mushroomed (bad for Millennials and their parents).

According to LendingTree’s Consumer Debt Outlook for June 2018, which is based on Federal Reserve data, American household debt is currently on pace to exceed the prior peak debt level from 2008 by the end of June, primarily due to the growth of student debt.

Total mortgage and consumer debt levels are on pace to reach $15.7 trillion at the end of the second quarter of 2018, versus $14.7 trillion 10 years ago. Consumer debt (which excludes mortgages) is on pace to exceed $4 trillion by December 2018.

Mortgage-related household debt has fallen by 5.5% while total consumer credit (a collection of revolving credit and installment loans) has increased by 45%, mostly because of student debt, LendingTree’s analysis found.

Household net worth, as measured by the Federal Reserve Financial Accounts, reached $100 trillion for the first time in the first quarter of 2018. Assets (primarily financial instruments and real estate) gained more than $1.07 trillion in the first quarter, outpacing the additional debt Americans accumulated.

[If estimates made by Edward Wolfe of New York University in 2017 remain true, the wealthiest one percent of Americans are worth about $40 trillion of that $100 trillion, the next nine percent are worth about $40 trillion, and the everybody else (the remaining 90%) are worth about $30 trillion.]

American household debt is currently on pace to be $1 trillion above the peak debt level of 2008 by the end of this month. That figure has been increasing at a 3.4% annual rate and includes mortgage debt.
As measured by a percentage of disposable income, outstanding mortgages comprise less of a liability for American households, even though they are the largest source of debt. Mortgage balances currently are around 68% of disposable income, down from 98% in 2008, as home equity has grown.
Total student loan debt, at more than $1.5 trillion, comprises 42% of all consumer debt. Millennials shoulder most of that. Student loans now represent 10.3% of disposable income, up from 6% in 2008.
Credit card debt, as a percentage of income, has fallen by about 30% since 2008. Credit card balances represent about 6.6% of income as of the first quarter of 2018, down from almost 9% a decade ago.

Student loan balances have risen 130% since the housing crisis began. Auto loans have risen 39% in the past decade. Credit card balances are slightly lower in nominal terms and even lower in real terms than they were in 2008.

In 2008, credit card debt comprised 40% of household liabilities, and student loan debt made up 27%. Today, student loans make up 42% of the nation’s household debt, and credit cards are now only 28% of the share.

In May, the Federal Reserve Bank of New York published somewhat different numbers:

Aggregate household debt balances increased in the first quarter of 2018, for the 15th consecutive quarter, and are now $536 billion higher than the previous (2008Q3) peak of $12.68 trillion.

As of March 31, 2018, total household indebtedness was $13.21 trillion, a $63 billion (0.5%) increase from the fourth quarter of 2017. Overall household debt is now 18.5% above the 2013Q2 trough.

Mortgage balances, the largest component of household debt, increased somewhat during the first quarter. Mortgage balances shown on consumer credit reports on March 31 stood at $8.94 trillion, an increase of $57 billion from the fourth quarter of 2017.

Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $8 billion, and are now at $436 billion. Non-housing balances saw a $14 billion increase in the first quarter. Auto loans grew by $8 billion. Student loan balances increased by $29 billion and credit cards declined by $19 billion.

Global Atlantic annuities to be available on Envestment platform

Posted on June 28, 2018 by Editorial Staff -

Global Atlantic Financial Group will be the first carrier to offer annuities on the Envestnet Insurance Exchange, a recently introduced program that integrates insurance solutions into the wealth management process on the Envestnet Platform, according to a release this week.

Initially Global Atlantic’s fixed annuities, including fixed-rate and fixed index annuities, will be available to Envestnet users at banks, broker-dealers, independent insurance agencies and Registered Investment Advisors (RIAs) throughout the US, the release said. Global Atlantic is part-owned by Goldman Sachs.

Envestnet has partnered with Fiduciary Exchange LLC (FIDx), a firm specializing in integrating advisory and insurance ecosystems, to develop and manage its Insurance Exchange. The exchange offers fixed, fixed-indexed, variable, contingent-deferred and private placement annuities with leading insurance carriers.

According to LIMRA statistics through the first-quarter of 2018, Global Atlantic’s fixed annuities are among the top five best-selling in the industry. The company ultimately expects to add registered annuities to the Envestnet platform.

The Envestnet Insurance Exchange connects select insurance carriers and established account processing vendors with Envestnet enterprise clients, allowing advisors to incorporate insurance solutions into the wealth management process.

The Envestnet Insurance Exchange will be available through various tools and features within the advisor portal of the Envestnet Platform later this year. Financial advisors will need an insurance license to introduce insurance products.

For those advisors who are not licensed, Envestnet will be offering a service called Guidance Desk that will allow unlicensed RIAs access to the consulting and fiduciary services that would enable them to use the Insurance Exchange. This service is still in development, the release said.

Posted on June 21, 2018 by No Author -

Source: IMF Global Debt Database.

Adding a ‘Retirement Tier’ to 401(k)s

Posted on June 21, 2018 by Kerry Pechter -

If you’re into high-end auto components, you may be familiar with Recaro seats. You may also be acquainted with Brembo disk brakes and ZF nine-gear automatic transmissions. Drew Carrington would like you to think about Franklin Templeton’s 401(k) funds in a similar vein.

Carrington is a senior vice president at Franklin Templeton Investments, where he leads the distribution of that firm’s actively managed funds through $1 billion-plus defined contribution plans. His job is to convince plans sponsors and their consultants that his company’s funds should be among the investment options they offer their participants.

Drew Carrington

He’s been spreading the word that large 401(k) plans should include a “retirement tier” reserved for participants who are nearing retirement. As participants age into this tier, they would receive new kinds of pre-retirement advice and have access to products that could help them transition from the accumulation phase to the decumulation phase.

Not coincidentally, Franklin Templeton has funds that can fill the retirement tier like fingers in a glove. Along with its Franklin Income Fund, which distributes interest and dividends, the company offers the LifeSmart Retirement Income Fund, which generates monthly paychecks, and Franklin Retirement Payout Funds, which lets participants schedule payouts up to five years before they retire.

But the current trends are not Franklin Templeton’s friends. Plan sponsors have been shrinking their fund lineups and, like investors, switching to index funds. Moreover, many plan sponsors do little to help retired participants keep their money in the plan (rather than rollover to an IRA) and draw regular income from their accounts.

The damage to Franklin Resources, the parent of Franklin Templeton Investments, has been acute: In the year ending April 2018, its funds saw net outflows of almost $28.7 billion (about 7.7%). Since the end of 2014, the Franklin Resources share price has lost about 40% of its value.

One tier, four elements

“‘Retirement Tier’ is an idea that we’ve been out in the market talking about,” Carrington told RIJ recently. “The word ‘tier’ is a shorthand way of describing groups of participants. On each tier you have certain participants and certain investments that are appropriate for each. The tiers typically refer to participants who either want the plan provider to ‘Do it for me,’ or ‘Do it with me,’ or who say, ‘I’ll do it myself.’

“A ‘Retirement Tier’ would be more than that,” he said. “We see it as having four characteristics. First, we think a plan should allow for partial ad hoc withdrawals for people who are over age 59½ and are separated from service. Today that type of person can only take a lump sum withdrawal, or execute a cash-out rollover or they can get one shot at setting up systematic withdrawals. Once you set up withdrawals, you can’t change your decision except to take a lump sum.”

“The second feature of a Retirement Tier would involve targeted communications for participants approaching retirement. There are many opportunities to engage these them. There are milestone birthdays, such as when they turn 50 and become eligible to make ‘catch-up’ contributions. The third piece involves providing coaching, models, or tools, such as a Social Security Optimizer.

“The final piece, which we think is especially important, is to offer a set of investments that are appropriate for retirees or near-retirees. It might be annuities. It might be income-focused investments, or managed payout funds. But it might also mean a broader set of tools on the fixed income side. You would not want to restrict the options to merely an aggregate bond fund or an asset preservation fund.”

Fund options for the retirement tier

If you surf over to the Retirement Income Solutions page of the Franklin Templeton website income generating funds on its website you find three:

Franklin Income Fund. This $77 billion fund ($2 billion in R6 retirement plan shares), which turns 70 years old this August, has an allocation of about 40% bonds and 40% dividend paying stocks. The rest is mainly in convertible bonds and cash. Almost all of its bonds are rated BBB (9%) or non-investment grade (87%). Institutional R6 shares have an expense ratio of 0.40%.

Franklin LifeSmart Retirement Income Fund. Created in 2006, this fund is a fund of Franklin Templeton funds with a gross expense ratio of 0.97% and a net expense ratio of 0.44% for R6 shares. It has only $3.8 million in R6 shares and $56.3 million total. With an asset allocation of 60% bonds and 40% stocks, it invests in Franklin U.S. Government Securities Fund, Franklin Floating Rate Daily Access Fund, Franklin Income Fund, Templeton Global Total Return Fund, Franklin High Income Fund and outside funds.

Franklin Retirement Payout Funds. Launched in mid-2015, this series of funds enable investors to build the equivalent of a bond ladder out of a series of target-date bond funds, each designed to distribute all of its principal and interest in the target year. The funds invest in U.S. dollar-denominated investment grade fixed income securities and in U.S. dollar-denominated foreign securities. Their institutional share annual expense ratio is 0.30%.

Carrington compared Franklin Templeton to the suppliers of specialty parts for high-performance cars. “The final assembly of an automobile is labor-intensive. It’s a tough business to be in. But think about companies that make specific high quality component parts: the Recaro seats, Brembo brakes, or ZF transmissions. Those companies are less labor-intensive, and they have higher profit margins. I would say, ‘We make really good transmissions and really good brakes.’”

‘Nobody wins that way’

While Carrington’s interest in promoting his funds is a narrow one, there’s fairly broad agreement in retirement income circles that retooling 401(k) plans should be updated to reflect their evolution into de facto replacements for defined benefit plans as the principal private source of retirement income for American workers.

Just this week, Kelli Hueler, the founder of IncomeSolutions, a web platform where individual investors can buy annuities from competing life insurers, testified at an ERISA Advisory Committee meeting on this topic. She urged the Department of Labor to revise its 22-year-old Interpretative Bulletin 96-1 so that plan sponsors can educate participants about decumulation and offer partial withdrawals for retired participants.

“Obviously, plan sponsors have been reluctant to provide any guaranteed solution,” Carrington told RIJ. “But they’ve also been reluctant to add additional options. The idea of a Retirement Tier sounds at first like it runs counter to the overall goal of plan simplification. But we would argue that you can communicate it in ways that make things less confusing. We’re talking about a full set of tools—changes in plan design, communication and technology tools—that help people close to retirement.

“Just offering investments in a vacuum without tools—that doesn’t achieve anybody’s objectives. But if you provide the context, and you make it more likely that sponsors will adopt them and that participants will use them, then you have better outcomes. We want to talk about what we do as part of a bigger picture.”

How Much Retooling Does the 401(k) Need?

Posted on June 21, 2018 by Kerry Pechter -

This was a talkative week in Washington, D.C. for folks who want the Department of Labor to tweak (or refrain from tweaking) the 401(k) system to reflect its emergence as American’s primary source of private retirement savings in a post-defined benefit pension world.

On Tuesday, Kelli Hueler of IncomeSolutions, the online annuity platform for plan participants and others, and Jack Towarnicky, director of the Plan Sponsor Council of America (now part of the American Retirement Association), both testified at a meeting of the DOL’s ERISA Advisory Council.

On Wednesday, the Employee Benefit Research Institute held a broadcast webinar on the findings of its Retirement Security Projection Model. Jack VanDerhei presented and Brett Hammond, the American Funds research chief and former TIAA executive, moderated.

Lots of issues are in the air: some new, some evergreen. Up to half of private-sector workers don’t have a tax-deferred retirement savings plan at work. The cost and quality of plans varies widely, depending on employer size and profitability. Too many workers still reach retirement without enough savings. Few plans teach workers how to convert 401(k) accounts into personal pensions.

The wild card factor for 401(k) plans has been the emergence of the rollover IRA. Trillions of dollars accumulate in 401(k) accounts, but when workers change jobs or retire, they move their account assets into rollover IRAs. As a result, individual brokers and financial advisors are replacing 401(k) sponsors as the proximate provider of income counseling. Reasonable people disagree on whether that’s a positive development.

‘Change IB-96’

Kelli Hueler

Hueler would like to see sponsors play a bigger role in income counseling. An entrepreneur who runs a respected stable-value data business, she has also barnstormed the nation for over a decade, enlisting support from jumbo plan sponsors like IBM, GM and Boeing for her IncomeSolutions web platform, where recently-separated plan participants can roll part of their savings into an immediate or deferred income annuity.

Hueler wants to change the 401(k) rules that currently discourage the conversion of savings to income. She urges the DOL to revise the language about participant education in a 22-year-old directive, Interpretive Bulletin 96-1, to “specifically address the decumulation phase” and highlight, among other things:

“The attributes of partial withdrawals in order to encourage plans to offer partial distributions, so participants may retain a portion of their savings in the plan as well as take advantage of institutionally structured and priced lifetime income alternatives and purchasing strategies.”

‘No new mandates’

Towarnicky presented testimony on behalf of the PSCA, which, until fairly recently, was called the Profit-Sharing Council of America. Members of the PSCA have no great desire to retool their plans to make them more defined benefit-like, nor, they say, are participants demanding such a change. He acknowledged a need to make it easier for retirees to draw regular income from plan accounts, but otherwise he thinks the status quo is working.

Jack Towarnicky

“Many plan sponsors use decumulation processes other than annuities to accommodate diverse participant demographics,” he said. “Because lump sum/installment payouts offer greater flexibility with less complexity and cost, they offer value to many more participants. Adding in-plan retirement income features are typically not top priorities as participants can customize retirement income by using the more than adequate decumulation/ retirement income products/options available in the IRA marketplace.”

Above all, plan sponsors don’t want government mandates and they want to avoid any activities—adopting in-plan annuities, recommending annuities, illustrating lifetime income—that might get them sued by participants down the road.

EBRI’s super modeling tool

In its webinar yesterday, EBRI, which compiles data on defined contribution plans, rolled out the latest findings of its Retirement Security Project Model. EBRI uses this tool to assess retirement policy proposals. Recently, EBRI assessed America’s retirement readiness and evaluated the following potential initiatives:

Auto IRA programs, such as the one proposed under President Obama’s 2015 Budget
Programs expanding access to defined contribution plans, such as the Automatic Retirement Plan Act of 2017 (ARPA) proposal
A universal defined-contribution scenario
Auto-portability proposals
Proposed reductions in the 402(g) and/or 415(c) limits

Evaluations of these proposals from the RSPM analysis included:

An automatic Individual Retirement Account (IRA with a three percent deferral would reduce EBRI’s estimated $4.3 trillion aggregate national retirement savings shortfall by $268 billion if there were no employee opt-outs but only by $202 billion if there was a 25% employee opt-out rate.
The Automatic Retirement Plan Act of 2017 would reduce the shortfall by $645 billion if there were no employee opt-outs but only by $495 billion if there was a 25% employee opt-out rate.
A universal defined-contribution system would decrease the shortfall by $802 billion if employers who do not currently sponsor a retirement plan would adopt a plan similar to those currently offered by plan sponsors with a similar number of employees (assuming empirically observed opt-out and contribution rates).
Auto-portability would reduce retirement shortages for those currently ages 35-39 by between 17% and 23%, depending on the number of future years of eligibility to participate in a defined contribution plan.

Merrill Lynch may bring back commissions on sales to IRA clients

Posted on June 21, 2018 by Editorial Staff -

Bank of America Corp’s Merrill Lynch Wealth Management is reconsidering an internal policy from 2017 that banned advisers from opening new retirement accounts that paid them commissions, according to a source familiar with the situation, Reuters reported this week.

Merrill Lynch, along with JPMorgan Chase & Co, moved away from brokerage retirement accounts last year, banning the opening of new ones and moving many clients into advisory accounts, in preparation for the U.S. Department of Labor’s fiduciary rule.

The fiduciary rule, an initiative of the Obama administration, was intended to curb conflicts of interest for financial advisers, especially when accepting third-party commissions on the sale of equity-linked annuities to rollover IRA clients. The 5th U.S. Circuit Court of Appeals vacated it in March.

Merrill Lynch head Andy Sieg told brokers on a conference call on Friday that the firm had launched a 60-day review of its individual retirement account policies and will consider keeping, relaxing or rolling them back, the source said.

The Anatomy of Global Debt

Posted on June 21, 2018 by Howard Davies -

At the end of May, the International Monetary Fund launched its new Global Debt Database. For the first time, IMF statisticians have compiled a comprehensive set of calculations of both public and private debt, country by country, constructing a time series stretching back to the end of World War II. It is an impressive piece of work.
The headline figure is striking. Global debt has hit a new high of 225% of world GDP, exceeding the previous record of 213% in 2009. So, as the IMF points out, there has been no deleveraging at all at the global level since the 2007-2008 financial crisis. In some countries, the composition of debt changed, as public debt replaced private debt in the post-crisis recession, but that shift has now mostly stopped.

Are these large figures alarming? In aggregate terms, perhaps not. At a time when economic growth is robust almost everywhere, financial markets are relaxed about debt sustainability. Long-term interest rates remain remarkably low. But the numbers do tend to support the hypothesis that the so-called debt intensity of growth has increased: we seem to need higher levels of debt to support a given rate of economic growth than we did before.

Perhaps that is partly because the growth in income and wealth inequality in developed countries has distributed spending power to those with a propensity to spend less than their income. That trend has leveled off recently, but the implications are still with us. It also seems that productivity growth has slowed, so a given quantum of investment generates less output than it used to do.

The IMF’s recommendation to governments is that they should fix the roof while the sun is shining: accumulate a fiscal surplus, or at least reduce deficits, in good times so that they are better prepared for the next downturn, which will surely come before too long. The current upturn is now quite mature.

That puts the IMF on a collision course with the tax-cutting United States administration and now with Italy’s new government. If the Italians’ grandiose plans for a minimum income and more public investment are implemented, they might soon find themselves in difficult discussions with the Fund. The team that has been in Athens for the past few years might soon be booked on a flight to Rome.

But what are the implications if the growth in debt is principally in the private sector? That is a question for the financial stability authorities in each country.
Since the crisis, new, far tougher capital requirements have been introduced for banks, and a set of macroprudential tools has been developed for regulators.

The idea is that regulators should be able to “lean into the wind” of excessive credit expansions, by increasing the amount of capital a bank must hold, with the aim of dampening the supply of credit before it reaches a dangerous level. The increase might be imposed across the board, or focused on mortgage lending, for example, if growth in house prices looks worryingly rapid. Other alternatives could be to impose maximum loan-to-value limits, or minimum down payments on home purchases.

New authorities were established to oversee the use of these new macroprudential tools. The European Systemic Risk Board (ESRB), chaired by European Central Bank President Mario Draghi, does the job in the European Union, and the Financial Policy Committee (FPC) of the Bank of England has domestic jurisdiction in the United Kingdom, though the Governor of the Bank of England is also Deputy Chair of the ESRB. (What will happen to that position after Brexit is unclear.) In the US, the Financial Stability Oversight Council (FSOC) is the coordinating body.

But there are important differences between them. The FPC is in some ways the most powerful of the three. It can impose a countercyclical capital buffer on UK banks, and has at times threatened to do so. For a time, the Committee took the view that unsecured personal lending was growing too fast.

The ESRB cannot act discretely, but it monitors EU and EFTA member states closely and publishes regular reports. The most recent review, last month, showed that additional buffers are in force in Sweden, Norway, Iceland, the Czech Republic, and Slovakia, in response to the particular credit conditions in those countries. France has since joined the list. In the eurozone of course, the ECB is the supervisor, so Draghi can put on a different hat and act directly, if necessary, through his own staff.

The US position is less clear. The FSOC is a coordinator, not regulator with its own powers. It is a bowl in which the alphabet soup of US financial regulators is stirred from time to time. It has no authority over its members and cannot impose countercyclical buffers. Its attempts to categorize large US insurers as globally systemic firms have been thwarted by the courts. There are those at the US Federal Reserve who wish it were otherwise, recognizing that without the support of the FSOC, which is chaired by the Treasury Secretary, they will find it hard, if not impossible, to dig into the macroprudential toolkit.

We must hope, therefore, that the Basel-based capital requirements imposed by the various US banking regulators are adequate. So far, the ratios have not been cut,

though other deregulatory initiatives, proposed by Trump appointees in the relevant agencies, are in the works. Macroprudential policy may be working as intended in Slovakia, but it is unlikely to come to the rescue where it needed the most: in the world’s biggest financial market.

Howard Davies, the first chairman of the United Kingdom’s Financial Services Authority (1997-2003), is Chairman of the Royal Bank of Scotland. He was Director of the London School of Economics (2003-11) and served as Deputy Governor of the Bank of England and Director-General of the Confederation of British Industry.

Outflows from global equity funds continues: TrimTabs

Posted on June 21, 2018 by Editorial Staff -

Demand for equity funds that invest primarily outside of the U.S. has been gradually diminishing since January, and flows have turned outright negative in June, according to TrimTabs, a research firm.

Global equity funds have shed $6.8 billion this month through Friday, June 15, putting them on track for their highest monthly outflow since at least September 2016.

Global equity funds have trailed their U.S. counterparts in four of the first six months of the year. They are down 0.9% year-to-date, while U.S. equity funds have gained 5.6%.

Breaking flows down, global equity mutual funds have lost an estimated $2.1 billion in June, on track for their first outflow in 15 months. Global equity ETFs shed $4.3 billion in May, their first outflow in 1½ years, and they have redeemed an additional $4.8 billion in June.

All major international regions have had outflows this month except for China, even though Chinese stocks have made no headway for months. China equity ETFs have added $400 million (1.9% of assets) in June, with inflows on all but one trading day, even though they are up a scant 0.2% month-to-date.

Despite the harsh rhetoric about China from President Trump since he took office, China-focused equity funds are on track for their sixteenth consecutive monthly inflow.

The most receptive advisors

OneAmerica names McCarthy to head Retirement Services

Principal Financial offers new retirement plan services for small and mid-sized businesses

Executive moves at Northwestern Mutual

Lincoln Financial extends services to RIAs at Orion

Data Connection

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