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US sends ‘myRA’ accounts to Retirement Clearinghouse

The Trump administration is about to finish shutting down one of the Obama administration’s key responses to the lack of retirement plans at tiny companies—the myRA program of auto-enrolled Roth IRAs—and is moving any remaining IRAs set up under the plan to a new custodian.

A notice on the Treasury Department’s myRA homepage warned myRA owners who have not yet moved their myRAs to a new custodian that the “open account in your name will be closed in September 2018 and the balance moved to a new Roth IRA in your name at Retirement Clearinghouse, LLC (RCH), a private sector IRA provider located in Charlotte, NC. The previous custodian was Comerica Bank.

Information on the number or combined dollar value of the accounts was not available.

RCH, formerly Rollover Systems, has for several years been seeking regulatory approval for a clearing system that would automatically transfer 401(k) assets from a former employer’s plan to a current employer’s plan whenever a participant changes jobs. Between plans, the assets would be warehoused at RCH. RCH says such a system would support continuity of saving and increase retirement security.

The myRA program grew out of an idea, developed more than a decade ago by David John (now of AARP) and J. Mark Iwry (now at Brookings Institution; a Treasury Department official under Obama), to create a workplace retirement savings program for employees at companies where no 401(k) or other savings program existed.

With no requirements for employers except to accommodate employee contributions through their payroll systems, the program offered employees a chance to begin saving in a Roth IRA. Initial contributions to the accounts had to be invested in U.S. Treasury securities to avoid volatility; when the accounts reached a value of $15,000, they could be transferred to a brokerage IRA at a private fund company and the assets diversified.

Before it was abruptly canceled in 2017, the myRA program was also expected to be used as a transition tool during the roll-out of state-sponsored auto-enrolled Roth IRA programs, such as OregonSaves and the California Secure Choice Retirement Plan. Those program resemble the myRA program, but at state level instead of a national level.

According to the notice:

“If you would prefer to withdraw your myRA account balance or transfer your account balance to another Roth IRA instead of having your account balance moved to RCH, you must act soon. The deadline for completing these actions is August 31, 2018. Because there is lead time needed to complete certain actions, in some cases the deadline for submitting action to myRA is August 17, 2018.

“For two years, there will be no account maintenance fees or fees associated with withdrawals, transfers, or the closure of your RCH account. RCH will also take over customer service responsibilities related to your soon-to-be closed myRA account, such as providing you with applicable tax forms, even if you close your account prior to the transition to RCH.

“Treasury announced the phase-out of the myRA program in July 2017, and stopped accepting new enrollments at that time. In December 2017, the program stopped accepting contributions (deposits). On a recurring basis, myRA account holders have been sent emails and letters to notify them that the program is being phased out and that they have the option to transfer their account balance to a private sector Roth IRA of their choosing.

Closing the remaining accounts and transitioning the balances to RCH will bring the program to an end. After the transition of your funds to a new Roth IRA with RCH, your funds will no longer remain in an investment issued by the Treasury, and Comerica Bank (the current Treasury-designated custodian) will no longer be custodian of your account. The new accounts with RCH will not be myRA accounts.

A Treasury press release from July 2017 set out the reasons for why the myRA program is ending. As noted in that statement, “The U.S. Department of the Treasury today announced that it will begin to wind down the myRA program after a thorough review by Treasury that found it not to be cost effective. This review was undertaken as part of the Administration’s effort to assess existing programs and promote a more effective government.”

Headquartered in Charlotte, NC, Retirement Clearinghouse, LLC (RCH) is a financial services organization that works with Individual Retirement Account holders, retirement plan service providers and investment providers. RCH has two wholly-owned subsidiaries: RCH Securities, LLC, a member of FINRA and RCH Shareholder Services, LLC a registered transfer agent with the U.S. Securities and Exchange Commission.

© 2018 RIJ Publishing LLC. All rights reserved.

The Big Turnaround in Retirement Policy

To the extent that the U.S. has a “retirement policy,” its flavor has definitely changed since Nov. 2016. Given the fact that a business-oriented administration has replaced a consumer-oriented administration, this should not be a surprise. It’s interesting to see who is taking the lead in setting policy today.

For one thing, the pro-Wall Street SEC, not the pro-consumer Department of Labor, is setting the standard for advisor ethics. The Obama DOL aimed to apply the protections and restrictions of the closely-regulated pension world to the tax-deferred IRA world. The SEC seems to tolerate rougher play in the advisory world, and seems satisfied with a caveat-emptor standard that will require consumers to watch out for their own best interest.

Regarding conflicts-of-interest in the advisory world, the Obama DOL tried to sharply reduce them (in part by demanding a written pledge of loyalty to clients from advisors selling variable and indexed annuities on commission) while still allowing business to proceed. For the financial industry, those same conflicts-of-interest—symbiotic relationships between product manufacturers and distributors—are the synergies at the very heart of its business models.

Industry opposition to the Obama fiduciary rule eventually led to its demise at the hands of the Fifth Circuit Court of Appeals. It remains to be seen what the SEC will do. The public comment period for its vaguely-worded “Regulation Best Interest” proposal just ended.

In the retirement income arena, the action has shifted from the executive branch to the legislative branch. Under Obama, the Treasury Department drove the government’s thinking about financial products for tax-deferred accumulation and distribution.

Mark Iwry at Treasury, for example, initiated the myRA workplace IRA program for savers at companies without 401(k) plans. He also initiated the Qualified Longevity Annuity Contract, now offered by a handful of mutual life insurers. It allows people who buy deferred income annuities with a portion of their tax-deferred savings (up to 25%) to defer required minimum distributions on that portion until income begins or age 85, whichever comes first.

That era is over largely over. The newest and most talked-about retirement ideas are bubbling up from the legislative branch. Utah Republican Sen. Orrin Hatch has proposed the Retirement Enhancement and Security Act (RESA) of 2018 and Massachusetts Democrat Rep. Richard Neal is sponsoring the Retirement Simplification and Enhancement Act.

The Hatch bill would allow retirement plan providers to sponsor 401(k) plans and invite dozens of employers to join. The Neal bill would reduce or even eliminate the legal liabilities that are said to deter many small company employers from sponsoring 401(k) plans. There are several other initiatives in the mix as well.

These efforts appear to reflect a spirit of deregulation in keeping with the new administration’s preferences. The new initiatives would relax some of the regulations of the Employee Retirement Income Security Act of 1974 (ERISA) and allow plan providers, including life insurers who are also plan providers, to sponsor and design 401(k) plans. If employers do bear less fiduciary responsibility for plan design in the future, insurers might even pre-build income annuities in 401(k) plans. Employers have been resistant to in-plan annuities because of liability concerns.

The Trump administration styles itself as “populist,” but the Obama approach to retirement was arguably much more populist, if populism and consumerism are at all related. The myRA and the QLAC ideas were aimed at the neediest, with their benefits tailored mainly to the accumulation and distribution challenges of individual lower- and middle-income Americans.

These initiatives offered only mild opportunities for people in the retirement business. By contrast, there’s a lot of excitement in the 401(k) industry about the Hatch and Neal bills. Those bills would make the small plan market more accessible to large service providers. Whether they would result in the availability of 401(k) plans to millions of currently uncovered American workers remains to be seen.

The new legislative proposals are said to have a 50% chance of becoming reality, perhaps as part of the next phase of tax reform. Given the gridlock and dysfunction in Washington, D.C.—a city that grows more opulent even as government decays—it’s equally possible that these potentially transformative initiatives could get kicked down the road.

© 2018 RIJ Publishing LLC. All rights reserved.

Mortality “much lower” in annuities with living benefits: Ruark

Adverse selection is evidently no myth where longevity insurance is concerned. Variable and fixed indexed annuities “with living benefit features exhibit much lower mortality than those without,” according Ruark Consulting, the actuarial consulting firm.

Ruark has released its 2018 studies of variable annuity (VA) and fixed indexed annuity (FIA) industry mortality. Highlights include:

  • Aggregate variable annuity mortality has declined 3% since 2015, attributable to a combination of underlying mortality improvement and changes in business mix.
  • Mortality results vary by product features, contract size, and tax status. Most notably, contracts with living benefit features exhibit much lower mortality than those without.
  • Ruark’s proprietary annuity mortality table provides a much better fit to VA and FIA experience than even recent standard industry annuity tables.

The studies are based on experience from twenty-seven companies from 2008 through 2017, and over $1 trillion of current account values.

“We have 60% more data than our last studies, allowing for high credibility even when splitting results by multiple factors of influence,” said Timothy Paris, Ruark’s CEO. “Moreover, we now have a lot more experience after the end of the surrender charge and bonus periods, commonly 7-10 years.

“As a result, these studies provide new and important insights into long-term annuity mortality, which should help issuing companies to refine their product designs, pricing, and risk management for these widely-used retirement savings and income products, particularly with pending changes to regulatory requirements,” he added.

Detailed study results, including company-level analytics and customized behavioral assumption models calibrated to the study data, are available for purchase by participating companies.

Ruark Consulting, LLC, located in Simsbury, CT, establishes industry benchmarks for principles-based insurance data analytics and risk management. It studies longevity, policyholder behavior, product guarantees, and reinsurance. Ruark collaborates with the Goldenson Center for Actuarial Research at the University of Connecticut.

© 2018 RIJ Publishing LLC. All rights reserved.

Sri Reddy joins Principal’s Retirement and Income Solutions group

Principal Financial Group has hired Sri Reddy, CFA, as its new senior vice president in Retirement and Income Solutions (RIS), effective September 4, 2018. Reddy will Principal’s annuities, full service payout and Principal Bank businesses. He succeeds Jerry Patterson, who now oversees the Full Service Retirement and Individual Investor businesses for RIS. Reddy will report to Nora Everett, president of RIS.

Reddy was previously the senior vice president and head of Full Service Investments for Prudential Retirement where he was responsible for the investments and retirement income businesses. Reddy also led Prudential Bank & Trust and Prudential Retirement’s registered investment advisor (Global Portfolio Strategies, Inc.).

Previously, he held senior leadership positions with USAA and ING. Reddy is a graduate of Baylor University and the Thunderbird School of Business Management. He also serves as a United States Department of Labor ERISA Advisory Council member.

© 2018 RIJ Publishing LLC. All rights reserved.

‘PEP’ Talk

Advocates of legislative proposals that would allow the creation of so-called PEPs—pooled employer plans—say that these provider-sponsored, multiple employer plans will encourage more small employers to offer 401(k) plans.

PEPs will accomplish that in several ways, they say: Above all, by removing most or even all of the legal liability that reportedly scares so many employers away from sponsoring federally-regulated plans; by reducing their administrative chores; and by reducing the notoriously high costs of offering a micro-size plan to the low costs enjoyed by participants in “jumbo” plans.

But, on that last point: it hasn’t been proven that PEPs would in fact save small company owners and employees a lot, relative to the cost of other available retirement plan options. “Small employers will get the benefits of scale, but joining a PEP won’t cut their costs in half,” Pete Swisher, national sales director at Pentegra Retirement Services and author of 401(k) Fiduciary Governance, told RIJ recently.

“The raw cost of providing a plan isn’t dramatically cheaper in the multiple-employer plan. It might take the cost of setting up a 401(k) from a $6,000 thing and turn it into a $5,500 or a $5,000 thing. But it’s not going to turn it into a $1,000 thing,” Swisher added;

Certain parts of the retirement industry are pushing hard for changes in pension law that would allow providers to sponsor PEPs and invite employers to join. Such arrangements, if widespread, could alter the economics and dynamics of the 401(k) business. Large providers could aggregate the assets of many small plans into pools large enough for them to serve economically. The providers might also offer financial wellness programs to participants in many small plans.

Through wellness programs, they could market emergency spending accounts, health care savings accounts, college savings plans, student debt management services, and perhaps even annuities. At a time when the actual costs of recordkeeping and investment options are falling (to near-zero, in the index fund business), large providers need new markets, a broader array of products, and a chance to capture IRA rollovers when employees leave plans or retire.

“Our strategy is to expand the footprint around the broader issue of financial wellness,” Harry Dalessio, head of Full Service Solutions at Prudential, told RIJ in an interview.

In this sixth installment of our series on MEPs and PEPs, we asked 401(k) experts if multiple employer plans would in fact bring lower costs to small employers and small-plan participants. There was no brief or easy answer. On the one-hand, small employers who currently offer high-cost plans could see lower costs in a pooled plan.

It’s true that many small companies still have high-cost plans with expensive investment options that financial advisors sold them long ago. But streamlined, low-cost, low-maintenance 401(k) plans are readily available to small employers today. And some suggest that the cost of keeping records for a dozen or more different small employers could be more complex and therefore more expensive than keeping records for a single plan.

Raw cost of a plan

“The assumption is that multiple employer plans must be about scale and cost-savings, but that’s not what they have to be about,” Swisher said. “We already have an example of a scaled-cost model with Vanguard. Vanguard went to Ascensus to be its recordkeeper for small plans, and they set up a couple of thousand plans a year. Ascensus offers a discount for that. Ascensus was already inexpensive and it became 5% or 10% less expensive. But that in itself is not transformative.

“If that’s all it was about, you don’t need a MEP for to achieve that. The base cost of that work, not the price but the cost, is $4,000 to $6,000. If you’re a micro-business, you don’t want to write a $4,000 check, or even a $2,000 check. A MEP will help with the effort, and a little bit with the cost,” he told RIJ.

“Everybody seems to think that you can divide that $4,000 by 100 and bring it down to $40. No, you can’t,” he said. “There are practical and legal obstacles. Each employer has to have compliance tests done individually, non-discrimination tests. These are tests that have to be done employer by employer. Each employer will have payroll costs. And there are problems that come with processing the different payrolls.”

MEPs “won’t lend themselves to being the cheapest solution [for employers who want to offer a retirement plan to employees]” he added, because they will be monitored by professional fiduciaries who will make sure that the job is done in the best possible way, not in the cheapest possible way.

Jack Towarnicky, executive director of the Plan Sponsor Council of America, agrees.

“A PEP’s small size and its significant flexibility would not necessarily reduce costs, introduce economies of scale/value add, nor lower fiduciary exposure – given the number of small employers in a PEP plan, the different payroll schedules and frequencies which complicate processing, the ability of each participating employer to select a diverse set of investments from a fund lineup – all coupled with numerous other differences in plan design and administration,” he told RIJ.

A veteran in the PEO plan space (PEO stands for professional employer organization, or employee-leasing company) told RIJ that it’s not necessarily cheap and easy to run a multiple employer plan if the companies in the plan don’t use the same payroll firm.

“We benefit from great efficiency in the PEO space because we get a single payroll feed from dozens or hundreds of companies,” said Justin Young, marketing director at Slavic401k. “But I still have to deal with thousands of individual companies on plan setup, contribution remittance, and processing and payroll issues. Someone will have to crack the code, otherwise recordkeepers will have to charge a lot more to run an open MEP.”

Slavic401k charges its clients a combination of asset-based and per capita fees, he said. It charges $39 per year per participant, plus a tiered asset-based fee that goes down as the adopting employer’s plan grows in assets.

A refuge for the asset-based fee model?

“For recordkeepers, it won’t be easy,” said Eric Droblyen, president and CEO of Employee Fiduciary, a third-party administrator of small 401(k) plans whose business could be threatened by the spread of MEPs.

“You have vesting, reconciliation to a single trust. You could have hundreds of different employers. My company could offer a multiple employer plan, but why would we? You’re not going to buy better investments. If you’re looking at plans priced on an asset basis, then yes, it’s a way to drive down costs. But that’s only if you’re married to the asset-based pricing model. Assets have almost nothing to do with the expenses of a 401(k) provider.”

Droblyen called open MEPs “the last gasp of asset-based pricing.” To him, they may make sense to large asset managers, but only in a world where larger pools of assets translate into larger revenues. He believes the 401(k) world must evolve toward per capita pricing, because it doesn’t place a disproportionate portion of the plan costs on participants with large accounts.

“You might have a 10-participant plan where one employee’s account is worth $10,000 and the company owner’s account is worth $1 million. The recordkeeping is just as difficult for one as the other. But with asset-based pricing, participants with high account balances are getting rolled.”

Others agree. “Honestly, if you’re paying 50 basis points (0.50%) for recordkeeping and you have $1,000 in your plan and your fee is $5 and I have a million in the plan and I pay $5,000, that is not equitable. Sooner than later the industry as a whole will have that epiphany and we’ll make a massive move to per capita pricing,” said Justin Young of Slavic401k.

“Guideline, for instance, charges $8 per participant and that’s charged to employer, it’s an all index lineup, and 8 basis points for the investments,” he added. “We look at that and say that’s extremely aggressive. But if were really in this for the best interest of the participant, that’s the best thing for the participants. But that would be hard pill to swallow [for plan recordkeepers and asset managers].”

Absence of a mandate

Pete Swisher believes that the private 401(k) industry has all the tools needed to bring 401(k) plans to small companies, and doesn’t believe that the federal or state governments need to sponsor umbrella plans, he does believe that a government mandate requiring all but the smallest employers to offer plans to employees might be necessary if the country hopes to reach universal 401(k) coverage.

“If there is a genuine need and the market has failed to meet it, then you have a prima facie case for government intervention,” Swisher said. “We don’t have a market failure so much as an absence of motivation. There are structures today whereby small employers could have plans. What’s missing is the cause for them to get out and do it. “It’s the absence of a mandate that’s the problem, not the absence of a product. The state programs will give a governmental stamp to stuff that’s already out there. I think public options will offer competition, I think people will still want help from advisors… that’s been the industry belief from early… the upshot is that the government will probably capture just a small part of the business. I’m not a doom-and-gloomer. If anything, I’m a take a glass three-quarters-full view.”

James Holland, of MillenniuM Investment and Retirement Advisors in Charlotte, NC, agreed that legislation alone won’t ensure that all American workers have a retirement plan. “The big push behind this is based on the idea is that if we just change the rules, somehow it will fix the problem. That doesn’t address the many employers who are unengaged or apathetic,” he said.

“You can lead people to water, and even give them a cup, but that doesn’t mean they will drink from it. I’m not anti-MEP guy by any stretch of the imagination, but this [legislative] proposal is far from a magical elixir. You can’t legislate this problem away. It as to be solved by the people involved—the plan sponsors, the advisors and the participants.”

© 2018 RIJ Publishing LLC. All rights reserved.

A new concept for defined contribution plans: The Retiree MEP

Many people in the retirement industry are talking about open multiple employer plans these days, and the concept of a “Retiree MEP” was shared at a retirement policy forum called “Modernizing the U.S. Retirement System, which the American Academy of Actuaries (AAA) sponsored at the National Press Club in Washington, D.C. last week.

“The idea builds on the open multiple employer retirement plan (“open MEP”) concept, which many people think has a good chance of passing Congress with next iteration of tax reform,” AAA Senior Pension Fellow Ted Goldman told RIJ in an interview after the event.

In Goldman’s vision of the future, a non-profit organization might sponsor an open MEP and invite companies to transition participant accounts in their existing 401(k) plans to the new plan. Within this MEP would exist a guidance platform–the Retiree MEP–where participants could receive objective information about retirement saving and distribution.

“Instead of putting the employer in the middle of it,” Goldman said, the platform might provide, for instance, an annuity-screening tool to help participants find the best contracts, or a service that would help employees choose an asset management firm or a managed account service.

The platform might also include the capability to help near-retirees decide whether to take a structured withdrawal from their account in retirement, or whether to buy a deferred income annuity (such as Qualified Longevity Annuity Contract). Models for such service platforms already exist at closed multiple employer plans, he said, such as the National Rural Electric Cooperative, Goldman said.

Attendees at the invitation-only forum represented congressional offices, government agencies, nonprofit organizations including the Academy, and academia. In addition to Goldman, speakers and panelists included:

Social Security Administration Chief Actuary Steve Goss, who framed how the current and future benefits provided by Social Security fit in the bigger retirement income picture, and described Social Security’s financial condition.

  • Lori Lucas, president and CEO of the Employee Benefit Research Institute, who moderated the program and facilitated the Q&A periods.
  • Mark Iwry, nonresident senior fellow in Economic Studies at The Brookings Institution; visiting scholar, The Wharton School, University of Pennsylvania; and former senior advisor to the secretary of the Treasury.
  • Steve Vernon, research scholar at the Stanford Center on Longevity.

Major themes of discussion included:

  • Restoring public confidence in Social Security and Medicare
  • Creating incentives to work longer
  • Providing protections and incentives to employers and service providers
  • Incorporating risk-mitigation strategies into plan designs

A position statement published by the Academy in fall 2017, “Retirement Income Options in Employer-Sponsored Defined Contribution Plans,” illustrates how actuarial principles can potentially be applied for improved lifetime income outcomes in a retirement system that has largely shifted to defined-contribution plans.

The American Academy of Actuaries is a 19,000-member professional association for the U.S. actuarial profession. It assists public policymakers with objective expertise and actuarial advice on risk and financial security issues. The Academy also sets qualification, practice, and professionalism standards for actuaries in the U.S.

More information about the Academy’s work on retirement policy issues can be found at actuary.org under the “Public Policy” tab.

© 2018 RIJ Publishing LLC. All rights reserved.

 

A Brave New Deregulated 401(k) World

Though only a few lobbyists, policy wonks and 401(k) insiders appear to fully recognize it, the defined contribution industry is approaching an historical inflection point.

If Congress passes certain proposed bills, employers could be relieved of most of the legal, administrative and financial burdens of choosing and maintaining 401(k) plans for their employees. Plan service providers and outside fiduciaries would assume roles traditionally belonging to employers.

By allowing many employers to join a single plan, these changes have subtle but powerful implications—with the potential to create new winners, losers and any number of unintended and unforeseeable consequences.

These points were made clear during an hour-long webcast this week sponsored by the LIMRA Secure Retirement Institute. In the webcast, entitled “Closing the Coverage Gap,” Ben Norquist, CEO of Convergent Retirement Plan Solutions, described the likely future of 401(k).

Ben Norquist

“There are three factors that we think are converging and are likely to transform the industry” in the next two to four years and which will help “move the needle” in terms of expanding plan adoption by small employers, Norquist said. These factors are:

  • “A myriad of federal legislation.” The Retirement Enhancement & Savings Act of 2018” (RESA) could “open the floodgate” to new MEPs [multiple employer plans]. MEPs or PEPs [pooled employer plans] would be the vehicle through which control over and responsibility for plan design would move to providers from employers.
  • “Momentum at the state level.” Oregon, Washington, Vermont, California and other states have set up or are in the process of setting up their own workplace plan solutions, such as retirement plan exchanges, mandatory workplace IRAs, and state-supervised multiple employer plans. Norquist described these efforts as both a threat and an opportunity for the private sector plan service providers. They could crowd out the private sector, with employers “dumping traditional plans into state plans,” he said. Or, by mandating a plan in almost every business, the states could be “a catalyst for [private] plan adoption” and offer opportunities for “up-selling” employers on the advantages of private plans over state plans.
  • “The fintech revolution.” New mobile and web-only digital technologies are disrupting all aspects of the financial services industry, Norquist said. Fintech startups threaten to “leapfrog” traditional retirement service providers. But large legacy providers have more knowledge of the market than startups do. Norquist believes that partnerships between fintech startups and established firms could be powerful.

Norquist recommended that existing retirement service providers follow these trends closely. He advised them to evaluate their own strengths and weaknesses; fine-tune their marketing messages; assess their vulnerabilities; build, buy or partner for necessary new capabilities; capitalize on the opportunities that will inevitably arise.

This was a timely webinar. Today, employers are like the general contractors of their retirement plans. They may not run the plans. But legal responsibility for the major decisions about a plan—what the investment options will be, how much employees will pay for the plan, whether there will be an employer match, and whether to have a plan at all—falls on them, even if they aren’t aware of it.

As such, they are the gatekeepers and guardians of their employees’ retirement savings. It’s a sacred trust. But it has also imposed a burden that many small employers aren’t willing or able to bear. Employer-centric plan sponsorship is seen by some as a bottleneck and a barrier to the universal adoption of tax-deferred workplace savings plans.

The new laws would mean that employers could stop sponsoring plans. Instead industry service providers would sponsor plans and employers would decide whether or not to join them. Others see it as a business disruption or even a threat. It amounts to a deregulation of 401(k)s, which scares some and elates others.

Others, especially large recordkeepers, see it as an opportunity. Legislators are backing the changes in the belief that they will help bring workplace savings plans to tens of millions of workers at small companies and avert an impending retirement income crisis in the U.S.

RIJ is following the progress of the legislative proposals. We think you should too.

© 2018 RIJ Publishing LLC. All rights reserved.

Ireland establishes guidelines for master trusts

Ireland’s pensions regulator has launched an inquiry into the future regulation of “defined contribution (DC) master trusts” with a view to encouraging consolidation in the sector. Master trusts are similar to the open multiple employer plans that are the subject of legislative proposals in the U.S.

In a document published this week, and reported by IPE.com, the Pensions Authority warned that there were “far too many pension schemes that are delivering poor outcomes for members. The Authority would like to see a smaller number of larger schemes to provide for future saving.”

Ireland’s government is exploring several pensions and welfare reforms, including changes to the state pension, new protections for defined benefit plans and participants, and the introduction of automatic enrollment. The Pensions Authority is seeking public comment on its proposed reforms by 5 October.

The Pensions Authority said it expected the number of DC master trusts operating in Ireland to increase. The regulator just published proposed requirements for master trusts, their backers and their trustees. For instance, each master trust must have a trustee board, the majority of whose members must be independent from the plan, its owner and any service providers.

The board must put forward a “detailed and comprehensive” three-year business plan for the master trust, showing income and expenditure forecasts and demonstrating that the trust “has a reasonable prospect of being viable under all scenarios.”

The trustee board – which should be set up as a “designated activity company” – must be “sufficiently capitalized”, the Pensions Authority said, with access to enough cash for two years of operations without additional injections. The regulator did not specify a figure for this, but said it planned to review each master trust’s financial position annually.

“Given their potential scale and inherent complexity, the Authority will consider master trusts to be in the highest risk category for supervision and specific reporting requirements will be in place,” the regulator stated.

Other proposed requirements for master trusts included written policies on engagement with members and employers, conflicts of interest, transparency of charges, and winding up the trust.

© 2018 RIJ Publishing LLC. All rights reserved.

With HSAs, raising contribution limits will raise contributions: EBRI

In a boon to financial companies that manage the assets in health savings accounts (HSAs) and a boost to employers who hope to reduce the rising burden of providing health insurance to employees, the House of Representatives has significantly raised the limits on employee deferrals into the tax-favored accounts.

The “Increasing Access to Lower Premium Plans and Expanding Health Savings Accounts Act of 2018,” which the U.S. House of Representatives passed last week, would raise the annual limits on contributions to HSAs, according to a release this week by the Employee Benefits Research Institute.

The new legislation would allow HSA contributions to match the out-of-pocket deductibles of the high-deductible health plans that the accounts were implemented to support. It would nearly double statutory limits on annual contributions to HSAs for those with single, employee-only, health coverage (to $6,550 from $3,450) and raise the limits for those with family coverage to $13,300 ($6,400 more than the current $6,900 limit).

Account holders over age 55 can contribute an additional $1,000 regardless of their health coverage level.

To find out if the increases would prompt additional funding into HSAs, EBRI consulted data in its HSA database. It found that only 13% of account owners contributed the maximum in 2016.  HSAs enjoy a triple-tax advantage: tax-deductible employee contributions, tax-deferred growth, and tax-exempt distributions for qualified medical expenses.

Account holders who held their HSAs for a longer period of time tend to contribute more, EBRI found. “The longer someone has had an HSA, the more likely they are to contribute the maximum,” said Paul Fronstin, EBRI’s director of health research.

“Only six percent of the HSAs opened in 2016 received the maximum annual contribution, whereas 30% of the accounts opened a decade earlier, in 2006, did,” he said, concluding that the longer an individual contributes to an HSA, the more they may appreciate the benefits of the accounts.

© 2018 RIJ Publishing LLC. All rights reserved.

Ascensus acquires two TPA firms

In a sign of further consolidation in the retirement industry, Ascensus, the plan services provider that administers small-company retirement plans for Vanguard, announced this week that it has agreed to acquire two third-party administration (TPA) firms: Continental Benefits Group, Inc., and 401kPlus. Both firms will be folded into Ascensus’ TPA Solutions division.

Based in Burlington, New Jersey, Continental Benefits specializes in tax-qualified retirement plans—401(k), profit sharing, cash balance, and pension plans—along with non-qualified deferred compensation plans, Ascensus said in a release.

Arlington, TX-based 401k Plus specializes in developing and administering participant-directed 401(k) plans, but also offers cash balance plans, traditional defined benefit plans, profit sharing plans, and money purchase pension plans.

Retirement Asset Advisory, Inc., a registered investment advisor (RIA) co-owned by 401k Plus’ owners, is not a part of the transaction and will continue to be managed separately.

© 2018 RIJ Publishing LLC. All rights reserved.

Prudential sells $923 million group annuity to Raytheon

Raytheon will reduce its pension obligations by $923 million by purchasing a group annuity contract from The Prudential Insurance Company of America, a subsidiary of Prudential Financial, Inc.

The agreement transfers the responsibility for paying certain pension benefits to approximately 13,000 U.S. retirees, as well as their beneficiaries, from Raytheon’s previously discontinued operations.

As a result of the transfer, Prudential will be responsible for making continuing payments to the affected retirees and their beneficiaries, in accordance with the group annuity contract.

Prudential Retirement has $427.6 billion in retirement account values as of March 31, 2018.

© 2018 RIJ Publishing LLC. All rights reserved.

A Letter to RIJ from Moshe Milevsky

I enjoyed the article in RIJ (July 26, 2018) on “why” people don’t annuitize, as well as the additional explanations not included by the academics and their Behavioral Finance handbook.

What I found interesting is that most of the reasons—and perhaps even all of them—can be placed squarely in the neoclassical (rational) economic framework developed almost 50 years ago.

In fact, if you read the original papers that first advocated full annuitization, they all made explicit assumptions on “preferences” and “frictions.” They all made it very clear that in the real world it would be violated. It’s a toy model.

To me this is no different than the (famous) Modigliani-Miller theorems about the irrelevance of capital structure or of dividend policy. Nobody in his or her right mind would advocate that companies ignore either of these decisions, or that both financial decisions don’t matter.

Likely you have not heard of the “corporate finance puzzle” about why some companies are both borrowing and/or paying dividends. Rather, the M-M theorem is a baseline for discussion about what matters most in the real world and who should finance with debt or who should pay higher dividends, etc.

The same holds with annuities. The focus of the discussion should be on:

  • Who would benefit from more annuities
  • How much they should own
  • What types should be purchased
  • How to explain this to people

This is especially important for the academic research agenda. Stop looking for puzzles to solve and start offering normative advice. That’s what the industry needs.

© 2018 RIJ Publishing LLC. All rights reserved.

Sneak Preview of New Book on Behavioral Finance

I’ve spent the past third of my life observing annuities, as an annuity marketer at Vanguard, as author of Annuities for Dummies, as editor of RIJ, and as a fly-on-the-wall at dozens of annuity conferences. Over that time, I’ve developed a few personal theories about why it’s so tough to sell annuities, especially income annuities.

Here are three reasons I think annuities aren’t more popular:

Few people spend two hundred big ones all at once, on anything. Most people value liquidity highly, and the purchase of an annuity means a cliff-like loss of liquidity. No one I know pays for insurance of any kind with a lump sum; their spouses would veto the transaction. The most sensible way to buy a retirement annuity is the way you buy your Social Security benefit from Uncle Sam: With a little bit of every paycheck, over a lifetime.

“Deadstick” landings are unpopular. When an airplane loses all propulsive power and the pilot has to emergency-land onto an airstrip or highway or cornfield (or the icy Hudson River, famously) with no way to regain altitude, that’s a deadstick landing. No matter how old, many people still hope to get rich someday. And they reduce their chances if they annuitize too much of their money. They feel less powerful.

Jack Bogle is not an avid fan. Vanguard has always preached that if you stay the course (keep expenses low, don’t try to market-time, and always have a few losers in your portfolio), then reversion to the mean and the equity premium will see you safely through and you won’t need to insure your investments. If St. Jack were a cheerleader for annuities, sales would be higher.

If you’re wondering if any of my hypotheses were ever tested in double-blind studies or published in peer-reviewed journals, they weren’t. And none of them shows up in the forthcoming First Handbook of Behavioral Finance (Elsevier), edited by Douglas Bernheim, Stefano DellaVigna and David Laibson.

In the just-published draft (NBER Working Paper 24854) of a chapter in the book called “Behavioral Household Finance,” authors James Choi of Yale and John Beshears, David Laibson and Brigitte Madrian of Harvard, review the best available research on the causes of the annuity puzzle. Here are the factors they collected and shared:

‘Actuarially unfair’ annuity prices. Several studies suggest that life-only income annuities don’t offer good value. According to one estimate, the average annuity owner only gets back between 75 and 85 cents for every dollar of purchase premium, with insurance company costs eating up the difference. To me this means: most people don’t expect to live long enough to be “in the money” on their contract.

A high fraction of household wealth is already annuitized in the form of future benefits from Social Security and private pensions. This seems intuitively right. For many people, the present value of their Social Security benefit can make up more than half of their net worth. On the other hand, the fact that most people minimize their benefits by claiming ASAP makes me wonder if they understand that Social Security is an annuity.

A bequest motive plus the opportunity to invest in equities can suppress annuity demand. It makes sense, as the authors observe, that people who are primarily thinking of their children’s inheritances would prefer individual stocks over annuities, especially where the investments aren’t held in qualified accounts. On the other hand, research shows that the bequest motive is fairly weak.

Married couples have built-in partial longevity insurance. On the principle that one can often live cheaper than two, or that a surviving spouse needs less income than an elderly couple, the book suggests that “when one member dies earlier than expected, there are more resources available to help meet financial needs if the other member lives longer than expected.” This explanation seems less than intuitive, although it makes sense that the high cost of many joint-and-survivor annuities, relative to single-life annuities, might hurt their appeal to couples.

Annuities are not popular in bull markets. “Annuity take-up is negatively correlated with recent stock market returns. Households appear to extrapolate when forming beliefs about future stock returns and therefore prefer lump sums that can be invested in equities when recent returns have been high,” the book says. Conservative investments don’t hold much attraction when the world seems to be ignoring risk. A smart near-retiree, you might hope, would sell inflated equities to lock in safe lifetime income. But most people don’t think that way.

Uncertainty regarding future health care needs. “Households may refrain from purchasing annuities and instead use accumulated wealth to self-insure against the risk of health shocks,” the book says. This sentiment could be especially strongest among people who dread the prospect of needing Medicaid-funded long-term care. At the same time, anyone with a health problem that reduces longevity expectations would obviously lose interest in life annuities, unless a discounted or “impaired risk” annuity were available.

Institutional factors don’t make it easy for plan participants to buy annuities. Since 401(k) plans generally do not include education that emphasizes the importance of turning savings into retirement income, most people don’t arrive at retirement with an understanding of or appreciation for annuities–or a well-marked path toward the purchase of one. “Few defined contribution retirement savings plans provide annuities as an option in the investment menu, and small frictions in the process of purchasing an annuity may decrease annuity take-up substantially,” the book says.

Not everyone is smart enough to make a sensible annuity choice. Is it dumber to buy an annuity or not to buy an annuity? It seems to depend on the situation. On the one hand, it takes a certain amount of financial sophistication to understand and appreciate the value of an annuity. Also, smart people tend to be wealthier, and wealthier people tend to live longer, so smart wealthy people, you might think, would value longevity insurance. On the other hand, people who are financially sophisticated are often confident enough in their investing ability not to feel the need for such a conservative financial instrument.

There you have them: Eleven answers to the annuity puzzle. Eight of them are deemed worth mentioning in an authoritative new textbook. Three of them come from my gut. Sellers of annuities should feel forewarned, if not forearmed.

© 2018 RIJ Publishing LLC. All rights reserved.

Mind the Coverage Gap

Would “open multiple employer plans” (MEPs) or “pooled employer plans” (PEPs) encourage thousands of small employers to offer their workers a retirement plan for the first time?

Or would these umbrella 401(k) plans, which plan recordkeepers, payroll companies and outsourced fiduciaries create and invite employers to join, mainly recruit and enroll employers that already offer plans?

More to the point: Would these relatively new types of plans significantly shrink America’s coverage gap—the fact that about half of full-time private-sector US workers lack a tax-deferred savings plan at work—or would they just rearrange and “cannibalize” existing market share?

In lobbying Congress to remove the legal barriers to MEPs and PEPs, major retirement firms and their advocacy groups have insisted that these plans will reduce the coverage gap. That argument didn’t sway the Obama administration, which preferred public remedies for the gap, such as a nationwide system of auto-enrolled IRAs called MyRAs or state-sponsored programs.

But the Trump administration appears receptive to an industry-led solution to the under-coverage problem. It axed the MyRA plan, and a top Labor Department appointee is the former Republican Senate aide who in 2016 wrote one of the pending proposals that could enable more open MEPs and PEPs. It remains to be seen if any of those proposals will become law.

For this installment of RIJ’s series on provider-sponsored 401(k) plans, we talked to several people with strong opinions regarding the questions posed above. The answers suggest that there probably will be some cannibalization and some growth in coverage. An industry-led solution is likely to close the coverage gap where it makes business sense to do so, but not necessarily in the areas of greatest need.

‘No consensus’

Troy Tisue, the CEO of TAG Resources, Inc. of Knoxville, Tenn., which provides outsourced fiduciary services to clusters of small plans, is well-positioned to comment on MEPs. He claims to have started the open MEP movement in 2002, after an IRS ruling confirmed the tax-favored status of certain umbrella 401(k) plans.

Often partnering with Transamerica as plan recordkeeper, TAG Resources began setting up such plans. His business model attracted imitators, and the field slowly grew. In 2012, after the Department of Labor declared that companies in an umbrella plan must have some “nexus” or commonality, he and Transamerica tweaked their model so that each employer in the plan filed its own Form 5500, a dreaded piece of essential red tape.

Asked about the issue of cannibalization versus coverage expansion, Tisue told RIJ, “40% of the plans we write are dead start-ups.” That is, about 60% of the employers he recruits already have plans. New employers join a Transamerica/TAG umbrella plan either because it lets them start up a plan for less or because they want to transfer most of the risk of being sued (for making a mistake in choosing investments or handling participant money) to an outside fiduciary.

“Everyone has an innate fear of doing something wrong. That’s why the employer wants delegation [of the plan watchdog or ‘fiduciary’ role],” Tisue told RIJ. Asked if he had ever detected pent-up demand for 401(k) plans among the employers or employees at small companies that don’t currently offer plans, Tisue couldn’t say.

A 2012 Government Accountability study showed no clear evidence that MEPs would shrink the coverage gap. “Overall, no consensus existed among MEP representatives and pension experts on whether or not MEPs such as PEO MEPs or open MEPs would substantially expand pension coverage,” the GAO report said.

“Several MEP representatives thought that MEPs had the potential to expand coverage, especially among small to mid-size employers that could benefit from the potential administrative and cost advantages. However, a couple of pension experts were skeptical that open MEPs would have much of an impact in expanding retirement plan coverage. For example, one pension expert said employee demand, rather than cost benefits offered by MEPs, drives whether or not a business sponsors a plan.

“While a couple of the MEPs we spoke with had offerings for employers to start new plans through the MEP, several targeted businesses with existing plans. For example, an open MEP representative said their adopting employers usually have over 100 employees or plan assets of $2 million to $5 million,” the report said.

“We, like GAO, found that open MEPs are not coverage solvers, but rather an attempt to offer a product with fewer restrictions,” former chief of the DOL’s Employee Benefit Security Administration (EBSA) Phyllis Borzi told RIJ. “It was a deregulation thing, because employers who had established 401(k)s would now be out from under their fiduciary burden.

“The industry would be cannibalizing its existing 401(k) business, so there would be no overall increase in coverage. So the Obama administration was not supportive it. We did talked about a version of open MEPs in the budget, but these could only be used or marketed however to employers who hadn’t had a plan for three to five years.”

Industry voices

Industry views are softer. “On the question of cannibalization, it’s not a matter of ‘either/or,’” said State Street Global Advisors’ managing director for public policy, Melissa Kahn, in an interview. “There might be some cannibalization. But for most part [open MEPs] will bring more people into the system. In Oregon, for example, they have a coverage mandate, and a lot of employers are voluntarily enrolling in plans even before they are forced to.”

Lori Lucas, president and CEO of the Employee Benefits Research Institute (EBRI) told RIJ, “We often hear that the burdens of offering retirement plans outweigh the merits. [Plan sponsors] cite the 401(k) litigation and lawsuits. They would eagerly move away from [direct plan sponsorship] if the system facilitated it. They would look at a widely accessible open MEP system as a way out of the traditional system. That would be a completely different dynamic. It would begin to cannibalize the industry.”

Jack Towarnicky, executive director of the Plan Sponsors Council of America and who sponsored a MEP among affiliated companies for 25 years, does not predict that open MEPs or PEPs will be the answer to the coverage gap.

“A PEP does enable small employers to band together, to qualify as a single plan, and to achieve a modest reduction in costs through simplified annual reporting and audit relief,” he told RIJ in an email. “Those savings may be substantial for small employers who have already adopted a plan.”

He added, in contradiction of some claims that PEPs will reduce plan costs significantly, that PEPs “may not change the cost calculation for those employers who have not adopted a plan. I am not aware of any predictions that a significant percentage of small employers who do not currently offer a plan will now adopt a PEP.”

Sharp sticks, plump carrots

Government statistics, albeit dated, showing that the larger the firm, the more likely it already offers a plan today. In 2009, only 31% of the half-million firms with 26 to 100 employees offered plans and 26% of the 725,000 firms with 12 to 25 employees offered plans. That’s where the opportunity for MEPs might be concentrated. The millions of firms smaller than that would be too insignificant for private firms to spend marketing dollars on. To the extent that they employ low-income workers, however, they become a concern of public policymakers.

No matter how cheap and easy providers make it to offer a plan, employers currently without plans wouldn’t necessarily jump into a pooled plan. Low-cost, low-friction ways to offer 401k plans or SIMPLE IRAs already exist for employers who are altruistically inclined to do so, or who want the tax breaks that go with offering plans, or who feel pressure from employees. States like California and Oregon are proceeding with state-sponsored plans on the assumption that it will take a mandate or at least a nudge to achieve universal 401(k) or IRA coverage within their borders.

“I like the idea of state- or large city-sponsored open MEPs, because you have experts, acting in the public trust, making critical decisions about plan design,” said Nari Rhee, director of the Retirement Security Program at the University of California–Berkeley. “They also command some market power to drive down fees on behalf of participants, and they’re more likely to reach scale. So far, the one in Massachusetts for nonprofits seems to be decent.”

“It’s no accident that most countries have gone to a mandatory DC system,” Borzi told RIJ. “You can’t have sharp enough sticks or plump enough carrots to get to the goal of universal coverage. But in the U.S. we’re not close to a mandatory system.”

© 2018 RIJ Publishing LLC. All rights reserved.

June was a ‘risk-off’ month for equities: Morningstar

U.S. equity funds saw net redemptions of $20.8 billion in June 2018, as long-term U.S. open-end mutual funds and ETFs saw their greatest outflows since August 2015, according to the Morningstar Direct Asset Flows Commentary for June.

June ended the third-worst first half for U.S. equity flows in a decade, after 2015 and 2009. Sector-equity, international-equity, allocation, alternative, and commodity funds all had net outflows. In their largest monthly outflow in at least a decade, large-blend funds alone saw net outflows of $19.4 billion.

Only taxable-bond and municipal-bond funds had inflows. Taxable-bond funds were the only long-term group with big inflows, adding $15.5 billion in June. Relatively conservative ultrashort-bond funds attracted almost $5.5 billion, and intermediate government funds gained about $3.1 billion in inflows. High-yield bond funds surrendered $3.4 billion in outflows.

Over the past 12 months, ultrashort-bond funds received $50.5 billion for a 38.2% organic growth rate. Since the start of Federal Reserve rate-hikes in December 2015, ultrashort-bond funds have attracted $85.3 billion, up from just $14.0 billion in the previous two and a half years.

For equities, it was a different story. “In a bit of a paradox, the greatest net outflows came from active U.S. equity funds, which had $17.1 billion in net redemptions versus negative $3.7 billion for passive funds,” the Morningstar analyst wrote.

Among individual funds, index offerings fared especially badly. Five funds–SPDR S&P 500 ETF SPY, iShares Core S&P 500 ETF IVV, Vanguard Institutional Index VINIX, Invesco QQQ Trust QQQ, and Vanguard Total Stock Market Index VTSMX–saw combined outflows of $14.7 billion.

While a few large passive funds had substantial outflows, the majority (about 70%) had inflows. About 26% of actively managed U.S. equity funds had modest inflows; T. Rowe Price Small-Cap Value PRSVX added about $660 million.

“Because ETFs are often used as trading vehicles, it’s hard to know how much of last month’s U.S. equity passive outflows reflect a change in investor sentiment versus simple trading or rebalancing. Looking from a broader perspective, U.S. equity inflows haven’t been terribly strong over the past decade,” the Morningstar report said.

“Since July 2008, U.S. equity funds have collected about $254 billion in inflows. That’s a big number, but it’s not that impressive when you consider that’s starting from a base of $3 trillion,” the analyst wrote.

“Yes, the past 10-year period includes a chunk of the credit crisis in 2008-09, but it also includes a historically long bull market. With the global population aging and many investors focused on capital preservation, equity demand among fundholders remains tepid.”

International equity funds saw outflows for the first time since September 2016, estimated at $9.8 billion. The average diversified emerging-markets equity fund was down 8.9% over the past three months. Net redemptions of about $8 billion from diversified emerging-markets equity funds represented the greatest net outflow in at least a decade.

Investors pulled a combined $625 million from emerging-markets bond and emerging- markets local-currency bond funds. Vanguard Total International Stock Index enjoyed about $7.3 billion in inflows, but emerging markets represent only about 17% of its assets. Foreign large-blend funds had $4.3 billion in inflows while Vanguard Total International Stock Index VGTSX, a core holding, collected $7.3 billion.

© 2018 RIJ Publishing LLC. All rights reserved.

Should We Worry About Higher Oil Prices?

In the middle of last year oil prices were $45 per barrel. A year later at $74 they are higher than anyone anticipated. What is behind this 65% increase in oil prices? What should we expect going forward? Could they be the catalyst for the Fed to accelerate the pace of rate hikes?

Oil prices began their ascent in the second half of last year as it became apparent that global GDP growth was accelerating. In April the IMF officially raised its estimate of global growth by 0.2% to 3.9% as the United States, European, and Japanese economies all gathered momentum. The prospect of faster growth began to push oil prices higher.

Since that time supply factors have come into play. The Venezuelan economy has plunged into a deep economic crisis. The IMF estimates that GDP growth will fall 15% in 2018, which would be the fifth consecutive year of contraction. Inflation is expected to skyrocket to 14,000%. The oil sector is in shambles as the result of chronic mismanagement and inadequate investment. At the beginning of 2016 Venezuela produced 2.6 million barrels of oil per day. That has fallen steadily to 1.5 million barrels per day currently — a multi-decade low — and analysts expect a further drop to 0.8 million barrels per day by the end of this year. This dramatic drop in production from a previously top-10 oil producing country has been a major factor behind the recent rise in oil prices.

In May President Trump announced that he was withdrawing from the Iran nuclear deal and intended to re-instate sanctions against Iranian oil exports. The idea is to slash Iranian oil exports from 1.3 million barrels per day currently to almost nothing. That announcement caused oil prices to jump by an additional $6 per barrel.

With the prospect of losing perhaps another 2.0 million barrels of oil output per day between now and the end of next year, can other oil producers pick up the slack? Perhaps. Last month OPEC ministers and non-OPEC producers agreed to step up production by about 1.0 million barrels per day with Saudi Arabia and Russia leading the way. However, there may not be enough unused capacity in those two countries to achieve the agreed-upon increase in production.

At the same time U.S. shale oil producers continue to boost output. Since the end of last year oil production in the U.S. has climbed from 9.8 million barrels per day to 11.0 million barrels currently, and the Energy Department expects production to climb further to 11.8 million barrels per day in 2019.

Between the announced increase in production by OPEC and the likely pickup in U.S. production, global output should counter most of the reduced oil supply from Venezuela and Iran.

At the same time the demand for oil could be reduced if countries that rely primarily on trade see some slippage in GDP growth caused by the newly imposed tariffs. China is a prime candidate for slower growth from reduced trade flows. As the world’s second largest economy slower GDP growth in China matters. In its recent revision the IMF did not soften its growth outlook for China, which it expects to slip from 6.9% last year to 6.6% this year and to 6.4% in 2019. However, those projections do not incorporate any impact from the broader trade actions announced by the U.S. in early July, which are bound to further curtail GDP growth.

Elsewhere, growth in most European countries and Japan will be negatively impacted by reduced trade flows. The IMF recently chopped GDP growth for Germany, France, Italy, Britain, and Japan this year by 0.3% apiece. The imposition of additional tariffs will further stifle growth in these countries.

The oil market is trying to digest unprecedented changes with output largely disappearing in a previously major oil-producing country, a potential significant drop-off in exports from another country as the result of sanctions, combined with a dramatic increase in output in yet another country. At the same time the demand side outlook is murky as the trade war between the U.S. and its trading partners escalates. Faster global growth contributed to the earlier increase in oil prices. Slower growth triggered by reduced trade flows will do the opposite.

For now, the impact from this combination of events appears to have produced a temporary run-up in oil prices, which are expected to decline over time. For example, the December 2018 futures contract for West Texas Intermediate crude oil is about $65 per barrel; the December 2020 contract expects a further drop to about $58.

The real concern will be if, at some point, business leaders become sufficiently uncertain about the economic environment that they are unwilling to invest in which case the global growth slowdown will become more pronounced. For now, the economic outlook is solid. Second quarter GDP growth in the U.S. should be solid at about 4.0%. Business confidence as measured by the ISM index is at a 14-year high despite all the trade talk.

Consumer confidence by any measure is equally buoyant.

The Fed will be concerned only if higher oil prices significantly boost inflation expectations. But, thus far, that has not happened. Survey-based measures of inflation expectations have been relatively stable. One such survey produced by the University of Michigan has been at about 2.75% since the end of 2016.

One market-based measure of inflationary expectations, the difference between the yield on the nominal 10-year note and its inflation-adjusted equivalent, has risen in the past year or so but remains subdued at 2.1%.

So, while the oil market has been struggling to adjust to some dramatic changes in production and possible changes in demand, thus far the recent increase in oil prices appears likely to be a largely temporary event with little negative impact on the U.S. economy or inflation expectations. If business and consumer confidence hold up and inflation expectations remain subdued the Fed will not be alarmed.

© 2018 Numbernomics.com.

‘Freedom’ is the key to Sammons’ new variable annuity

What makes a skeptical advisor sit up and notice a new variable annuity contract? Three factors rank high: ample equity exposure, a guaranteed floor income, and maximum ability to access the money in the contract.

In their unusual new LiveWell Freedom Variable Annuity contract, Sammons Retirement Solutions and Midland National Life have done a creative job of arranging the product’s moving parts to respond to those criteria.

“You can’t come out with something that’s like everybody else and expect to change the market,” Sammons CEO Bill Lowe told RIJ in a phone interview this week. “Variable annuities with GLWB [guaranteed lifetime withdrawal benefits] riders were selling better when the benefits were higher. First, you have to have upside potential. So we allow up to 80% equity exposure.”

LiveWell Freedom VA owners are required, in fact, to allocate between 60% and 80% of the premium to one or more of only five equity fund options. The product has an annual roll-up linked to the returns of the S&P 500 Index as well as a novel “Freedom Date.”

The Freedom Date provision allows the contract owner to take money out of the contract without affecting the annual income payment after a 20-year holding period (25 years if the owner is under age 60 at time of purchase. (There is no guarantee, however, that there will be a positive balance in the contract after 20 years of withdrawals and fees. But the high equity allocation makes it conceivable.)

“The unique feature is the Freedom Date,” Lowe said. “If you buy this at age 60, at age 80 you have 100% access to the accumulation value without negatively affecting the lifetime payment account. And after that point, we no longer charge for the rider.” In other words, clients don’t have to outlive all of their own assets before starting to receive the insurer’s money. “Normally, with a GLWB, the insurer doesn’t pay those benefits until you run out of money,” he added.

The design of the roll-up is also novel. “You’ve seen those contracts with a five percent or six percent roll-up,” Lowe said. “We tied the roll-up to the S&P 500.” Each contract year after purchase, the income base increases by 2% plus 75% of the gain in the S&P 500. The annual roll-up stops at the first withdrawal, or when the income base reaches 200% of the value of the original premium.

The insurer pays for these benefits in part by lowering the generosity of the withdrawal rates. Between the ages of 60 and 64, withdrawals are limited to 3.5% of the benefit base (which unlike the account value, is not exposed to market depreciation) per year (3.0% for joint-and-survivor contracts). For ages 65 to 69, withdrawals are capped at 4% per year (3.5% for joint contracts). Withdrawals in excess of the cap reduce the account value and the annual payout.

As for the roll-up’s promise of 75% of the gain in the S&P 500 Index during each contract year, the insurer uses a portion of the annual 1.45% GLWB rider fee (based on the value of the income benefit) to hedge against higher-than-expected gains in the index. The GLWB fee is assessed every year that the contract is in force, and not just in years when a roll-up is earned.

In addition to the GLWB rider fee (which the insurer can adjust as high as 2.50% during the life of the contract), there’s a .90% annual mortality and expense risk fee (which the insurer can apply to distribution costs) and an annual administrative fee equal to 0.35% of the account value.

Investment fees on the 10 mutual fund options (see box below) range from 0.61% per year to 1.10% per year. None of the funds have “volatility controls” that act as built-in buffers on their appreciation. When the contract owner or owners die, a death benefit equal to the remaining account value is paid.

The contract has a seven-year surrender period with a maximum penalty of 8% on withdrawals that exceed the free withdrawal limit, which is equal to 10% of the account value, the regular income payment if income has begun, or the amount of the contract owner’s requirement minimum distribution from a qualified contract purchased with pre-tax money.

The LiveWell Freedom variable annuity is distributed through banks, independent broker-dealers and full-service broker-dealers (wirehouses). “We’re generally focused on the regional full services distributor,” Lowe said. Asked if the LiveWell contract might cannibalize some of Midland Life’s fixed indexed annuity sales, he said, “It’s a completely different buyer. [The FIA buyer] One is conservative and values the protection of principal. The [VA buyer] says, ‘I’d like to have more upside.’”

© 2018 RIJ Publishing LLC. All rights reserved.

RIAs should beware the stress of success: Cerulli

Registered investment advisors (RIAs) encounter a new set of growing pains when they reach $1 billion in assets under management (AUM), according to recent research from Cerulli Associates, the global research and consulting firm.

“As smaller RIAs reach $500 million or more in assets, they transition from a practice to become a functional business, but as firms surpass $1 billion in assets, they reach a new phase in their business lifecycle,” said Kenton Shirk, a director at Cerulli, in a release.

“In many cases, they begin to support a growing number of advisors across multiple locations, and as they centralize services and resources, they develop a home-office support structure analogous to that of a broker/dealer (B/D).” At that stage of development, RIAs need to acquire a new set of competencies or risk losing competitiveness.

“They now face new challenges such as attracting and retaining advisors, building scale across a large number of advisors, enhancing advisor productivity, and offering a consistent and positive client experience across a large organization,” said Shirk. “They need to build an executive management team, which often includes hiring roles such as chief operating officers, chief compliance officers, and chief investment officers.”

Billion-dollar RIAs grew 9.8% annually during the five years ended 2016, according to Cerulli. RIAs with $250 million to $500 million in AUM grew 11.8% and firms with $500 million to $1 billion grew 10.6%. The seven RIAs with $10 billion or more at the beginning of the period grew only 6.0%, underperforming the growth rate of small broker/dealers with $10 billion to $50 billion (9.5%).

Despite these hurdles, “RIAs that can overcome these challenges could ultimately become formidable competitors among wealth management firms,” Shirk sad.

These findings are included in the 3Q 2018 issue of The Cerulli Edge–U.S. Advisor Edition.

© 2018 RIJ Publishing LLC. All rights reserved.