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How Not to Sell an Indexed Annuity
“Run like hell.”
When RIJ invited comments on our April 5 article, “Should My Neighbor Buy That Indexed Annuity?” which described a woman’s real-life experience with an advisor she met at a free retirement planning seminar, we didn’t expect to hear much praise for the advisor’s assertive approach.
And we didn’t. We received five responses, all of them more or less shaming the advisor. Two of the responders asked that we not reveal their names. They were not speaking in their official industry capacities. The others were Curtis Cloke, creator of the Retirement NextGen planning software, Bryan Anderson, of Annuity Straight Talk in Kalispell, Mont., and Phil Lubinski, creator of the IncomeConductor time-segmentation planning.
If you didn’t see the article, here’s a synopsis: My neighbor, who is 60 and would like to retire in seven years, has about $313,000 in savings. Most of it is in qualified accounts. She attended a advisor speak at a free retirement planning seminar held at a community college, and accepted his offer of a free consultation.
At their next and final meeting, he advised her to put $188,000 in a fixed indexed annuity (FIA) with a lifetime income benefit with a premium bonus and a roll-up. At age 70, after a 10-year deferral, it would pay her about $21,000 a year for life. With Social Security, she would have an income of $4,000 in retirement, which was her self-estimated need. He suggested she put the rest of her money in a managed account at his broker-dealer.
The blunt advice in the quote at the top of this story came from one of the anonymous sources, who likes indexed annuities as products but who didn’t like the advisor’s practices.
Phil Lubinski
Lubinski condemned the advisor for trying to commit my neighbor to a long-term investment when she still faces several unknown factors, such as her own health status and her potential for an inheritance. “How dare he present the numbers to support this sale and force her to work three years longer than she wants?” he wrote in an email.
“Maybe there wouldn’t be enough assets to inflation-proof the equivalent of $4,000 per month in today’s dollars at her age 67 retirement date. But, at the very least, he should have shown her how long she could support that income and then dig deeper into the possibility of an inheritance as the continuation of her income.
“After all the smoke and mirrors and “bonuses”, the $188,000 growing to a benefit base of $269,000 after 10 years implies about a 3.65% return,” he added. “I wonder what the actual surrender value was after 10 years. I dare say she should be able to earn 3.65% in a conservatively managed account and have 100% liquidity.”
Cloke, a subject matter expert for The American College’s Retirement Income Certified Professional designation program, didn’t like the fact that the advisor in our story seemed to be rushing my neighbor into a product sale.
Curtis Cloke
Cloke told RIJ that opposes any advice product that leads with a product and with any proposal that fails to include many hours of careful consideration, an inventory and assessment of the entire household balance sheet, and at least three meetings with a prospective client. (My neighbor had two meetings, in addition to attending the free seminar.)
When meeting with prospects or clients, he prefers to let the plan arise from a client’s own choices and decisions. Otherwise the client will not feel ownership of the plan, and the negotiations will collapse. Which is exactly what happened in my neighbor’s case. She felt that a solution had been imposed on her, and she recoiled.
She was, in fact, put off by the penetrating look in the advisor’s eyes when he tried to close the annuity sale. “I didn’t get be 60 years old without recognizing that look,” she said. She ignored the advisor’s follow-up calls and eventually blocked him from her Facebook page.
Writing from northwest Montana, Anderson recommended that my neighbor, instead of buying an indexed annuity with a living benefit, should invest in an riderless indexed annuity and take annual penalty-free withdrawals up to the 10% limit, or as needed.
Bryan Anderson
“Your neighbor should not pursue this strategy, for two reasons. First, the income rider would lock up 60% of her available funds. Second, the management fees and rider fee would erode her principal over time, so she’d have no real flexibility or control. The windfall from downsizing her home will put her in a stronger position. So would the inheritance she’s likely to receive,” he said.
“She should simply re-position her assets with an allocation model that fits her risk tolerance and that gives her enough liquidity to cover her income gaps on a discretionary basis for short periods of time,” Anderson added.
“Long-term decisions can wait until she’s closer to retirement. If she wants to buy an annuity now, then she should buy one without an income rider and without fees so she can have maximum yield, liquidity and control over the assets with the option to re-position those assets when she’s nearer to retirement.”
One of our anonymous critics, however, suggested that the advisor offered her tough-love, in a sense. He wrote:
“Her real problem is that she doesn’t have enough money to retire at 67. Therefore, in a sense, the advice she received not to retire until age 70 was good advice. The advice may have been designed to get her to the 10-year mark of the annuity rather than to encourage her to work longer, however.
“If you’re asking if she should buy the indexed annuity or the deferred income annuity (DIA), I would recommend the indexed annuity. It will cost about the same as the FIA, but she can liquidate the FIA if necessary. This is one of those strange annuity pricing quirks. Since FIA issuers can assume much higher lapse rates than DIA issuers, they can guarantee the same amount of income but still offer a cash value.”
“An annuity will give more income per dollar of investment than any other option. To get the same payout on a regular investment portfolio, she is going to have to do 7% systematic withdrawals. At the end of the day, we’re back to the fact that she doesn’t have enough money to retire at 67 and take $4,000 per month,” he wrote.
Would this type of sale have been prevented by the Department of Labor’s 2017 fiduciary rule, as drafted by the Obama Administration? Our advisors disagreed.
Anderson didn’t think so. “I have no confidence that the DOL rule would have changed anything,” he wrote. “The sale would have gone forward regardless. The investment advisor’s team, if unable to sign the Best Interest Contract themselves, would have easily have found an institution do so. In any case, ‘best interests’ are a matter of opinion. An advisor’s abilities only go so far as his knowledge of available products and strategies.”
But Lubinski thought this transaction would have failed the Best Interest Contract Exemption (BICE) test of the fiduciary rule. “What compliance department would allow a rep to take 60% of a 60-year-old’s assets and cram them into an indexed annuity with a 10-year surrender schedule?” he wrote.
“This is exactly the type of situation that the DOL was trying to oversee. It’s why, at the last minute, they didn’t give indexed annuities a prohibited transaction exemption and forced them to be part of a BICE.”
© 2018 RIJ Publishing LLC. All rights reserved.
La Vida Robo
Not long after Carlos Armando Garcia graduated from MIT with a bachelor’s degree in electrical engineering, he was hanging out with other quantitative analysts at Merrill Lynch in New York when somebody mentioned the company’s 401(k). Garcia remembers thinking: “What’s a 401(k)?”
That was a wake-up call for Garcia, the son of a chemical engineer, a soccer-player and president of his high school class back in El Paso, Texas. If he was clueless about retirement planning, he figured, the same must be true for millions of other Hispanics in the US.
Turning that realization a business took awhile. But in 2016, after co-founding and selling two B2B fintech startups, Garcia launched Finhabits, a bilingual B2C mobile-friendly savings tool that sits on an Apex Clearing platform. Similar to Stash, but with a Spanish spin, Finhabits helps financial neophytes open a Roth or traditional IRA with as little as $5 a week.
“The difference between us and a Betterment or a Wealthfront is that they’re interested in capturing the upper tier of the workforce,” Garcia told RIJ recently. “A lot of their clients already have investments and know a stock from a bond. Ninety-five percent of our client base has never had an investment account. It’s a different market.”
This spring, Finhabits, along with Principal Financial and Saturna, become available on Washington State’s new online retirement plan marketplace, where workers and employers can find simple, low-cost IRAs or 401(k)s. Still only a seven-person operation located in a WeWork co-working space in Manhattan’s Soho district, Finhabits claims to be on-boarding about 1,000 new clients each week at an average weekly contribution rate of $40 per client. “By the end of 2018, we expect to have close to 55,000 accounts and have about $55 million under management,” Garcia said.
From El Paso to Wall Street
Garcia’s parents emigrated from Juarez, Mexico to El Paso, Texas, where he was born and grew up. The region is dense with maquiladoras, the assembly plants that sprouted on the border with the passage of NAFTA in 1995. The prospect of a factory job draws people toward the border, creating a market for all kinds of small ventures. El Paso, where 73% of the businesses are Hispanic-owned, is known for entrepreneurship.
“A border town breeds entrepreneurship,” he said. “There’s a constant influx of people from the south, which creates a transient society. They come for a few months and then continue. It creates an opportunity society for the people who cannot cross.”
After graduation from MIT in 2002, Garcia worked as a quantitative analyst for Merrill Lynch Investment Services. He left in 2009 to co-found Fundspire, a hedge fund analytics and reporting service. In 2012, he sold Fundspire to eVestment and started Madison Quant Labs, a hedge fund.
Proceeds from the sale of those firms helped kickstart Finhabits. Outside money followed. “We have funding from New York financial industry executives that support us on their own tab. We have external investors, so we need to produce results. But we’re looking at it long-term,” Garcia told RIJ.
From the Finhabits website
Finhabits’ homepage, like many B2C fintech sites, feels as safe and colorful as the playground in a McDonald’s franchise. “We believed that we could make the savings process simpler and easier. We started by simplifying the message. We shortened the enrollment process to less than 10 minutes,” Garcia said.
The website text emphasizes saving more than investing. A visitor has to plumb the FAQs to learn that portfolios are composed of up to 11 Vanguard or BlackRock exchange traded funds (ETFs), covering stocks (U.S. and international) and bonds (corporate, government, tax-exempt and inflation-protected).
“You just connect your bank account and decide how much you want to contribute each month,” Garcia said. “You can pause it if you have three months with no income. There’s an app for mobile phones.” When clients change jobs, nothing changes, because the contributions don’t go through an employer’s payroll plan.
For Finhabits clients outside the [Washington State] marketplace, Finhabits charges $1 a month for balances under $2,500, and 50 basis points a year for investments. The investment cost is capped at 50 basis points. The average ETF expense ratio is 12 basis points a year.
Sending money home
As for marketing, “We’re on all the important digital platforms such as Facebook, Google, YouTube. We also have TV ads on select networks,” Garcia said. “We have a direct to consumer effort and we have partnerships. We work with credit unions. We’re not talking just about the ‘gig’ workforce.
“There’s only a 10% chance that any worker in a small business has access to a retirement benefit. We have a lot of clients from states with heavy non-white workforce, including California, Texas, Georgia, New York, Illinois, and now in Washington State,” he said.
For the Washington State marketplace, Finhabits clients with balances under $1,500 pay only the fees on the available Vanguard target date fund or balanced fund. The annual wrap fee on balances higher than $1,500 is 50 basis points a year but never more than one percent.
In his search for Latino clients, he has crossed paths with Cindy Hounsell, the director of WISER, the Women’s Institute for a Secure Retirement. Hounsell recently received a $150,000 grant through AARP’s Latina Savings Project to work with MANA, a national Latina organization, to develop and implement a Latina Retirement Savings Project in Topeka, Albuquerque, and Baytown, Texas.
Because the Trump administration killed the federal MyRA program, an Obama-era effort to auto-enroll people into Roth IRAs at work, she found a replacement for it in Finhabits, which has participated in a series of Retirement Savings Workshops with WISER. “What Carlos is doing is great. People in Texas, even if they weren’t Hispanic, thought that what he was doing was wonderful,” Hounsell said.
It’s not that Latinos in the U.S. don’t save. Collectively, they send an estimated $69 billion in savings back to their home countries in Mexico, the Caribbean and the rest of Latin America, according to a 2017 report from Inter-American Dialogue.
A 2007 study, “Causes of Latinos Low Pension Coverage,” suggested that by “the high priority placed by many Latinos, especially Mexicans, on sending money back to their countries of origin tends to crowd out other kinds of spending, like saving for retirement.”
Latinos are also less likely to have a pension plan where they work. “In manufacturing, 39.3% of Latinos participate in a pension plan at work compared to 58.6% of blacks and 67.8% of whites,” said the paper. “In 2001, 44% of Latinos worked for employers who offered pension plans, compared to 64% of blacks and 63% of whites.”
Finhabits’ own research shows an inverse relationship between the Hispanics presence in a city and the share of small business workers with retirement plans. Minneapolis’ population, for instance, is 6% Latino and 39% of small business employees are covered. In Laredo, Texas, the population is 96% Hispanic and only 8% of small business employees have a plan.
But the demographic future could look very different. The trend is Finhabits’ friend. According to the Census Bureau, the Latino population of the U.S. will double by 2060, to 119 million. That’s almost 30%. “The Hispanic population is growing,” Garcia told RIJ. “If current population trends continue, Latinos will eventually become a majority.”
© 2018 RIJ Publishing LLC. All rights reserved.
Working 9-to-?
Perhaps you’ve seen more white-haired people working in supermarkets and at big box stores like Home Depot. They’re part of a major trend. As a new study makes clear, “increases in education, women’s growing role in the economy, the shift from defined benefit to defined contribution pension plans, and Social Security reforms” have been driving a surge in longer work.
The study, “Working Longer in the U.S.: Trends and Explanations” (NBER Working Paper 24576) by Courtney Coile of Wellesley College, indicates the following:
- A shift in employer-provided pensions from DB to DC type plans reduced the share of workers facing strong incentives to retire at particular ages, while a decline in retiree health coverage left some workers with no means of obtaining health insurance other than through their job, at least until the Medicare eligibility age of 65; both changes contributed to longer work lives.
- Changes to the Social Security FRA (full retirement age), DRC (delayed retirement credit) and RET (retirement earnings test) have strengthened the incentive for work past the FRA, contributing to the increase in participation at older ages.
- Three changes to Social Security – the increase in the FRA, the increase in the DRC above the FRA, and elimination of the RET above the FRA – seem likely to have contributed substantially to the increase in employment at older ages, particularly at ages 65 and above.
- Each one percentage point increase in the DRC is associated with a roughly one percentage point increase in the employment rate of men ages 65 to 69. This estimate suggests that the five-point increase in the DRC since 1990 could explain up to half of the increase in participation of men ages 65 to 69 over this period.
- For men ages 60 to 64, participation began to rise in the mid-1990s, growing from 53% in 1994 to 62% in 2016, a 9-point increase. For men ages 65 to 69, the trend began a decade earlier and the increase to date is 12 points, from 25% in 1985 to 37% in 2016.
- The trend for women is quite different. In all age groups, participation has risen continuously since 1980, increasing by 17 points at ages 55 to 59 and 60 to 64 and by 13 points at ages 65 to 69. In 2016, nearly two-thirds of women ages 55 to 59 and half of women ages 60 to 64 were in the labor force.
- There are very large differences in participation by education. On average across all years, the participation of college graduates is 25 points higher than that of high school dropouts for both men and women ages 60 to 64; at ages 65 to 69, the participation gap between college graduates and high school graduates is 23 points for men and 15 points for women.
- Single men participate at rates 10 to 20 points below their married counterparts, depending on the age group, and these differences have been stable or widened slightly over time. In the case of women, single women in 1980 had participation rates 16 to 18 points higher than those of married women at ages 55 to 64 and 8 points higher at ages 65 to 69.
- Self-employment is fairly popular among men, with 12 to 13% of men ages 55 to 64 and 10% of men ages 65 to 69 engaged in such work in 2016; rates of self-employment among women are about half as large.
- The fraction of men working part-time (less than 35 hours per work) is low but rises with age, at about 6% of those ages 55 to 59 and 9% of those ages 65 to 69. Part-time work is more common for women, with 11 to 12% of all age groups working part-time in 2016.
- Health at older ages – as measured by mortality risk – has improved substantially over time. The mortality rate at age 60 has declined by 40% for men and one-third for women since 1980. While better health may have supported longer work lives, there is little evidence that it is a primary driver.
“Many workers may choose to work longer as a result of the FRA increase, which helps to offset the effect of the FRA increase on their retirement income,” Coile told RIJ in an email. “In this sense, longer work lives may be seen as a good thing, or at least as necessary to maintain the same standard of living.
“However, it is important to recognize that there will always be some who struggle to work longer, for example due to poor job market prospects or poor health; for them, the rise in the FRA will result in lower retirement income.”
© 2018 RIJ Publishing LLC. All rights reserved.
For advisors, DOL enforcement holiday still in effect
Today, the Department of Labor (“DOL”) issued Field Assistance Bulletin 2018-02 (FAB), which indicates that both the DOL and the IRS will continue to rely upon its previously announced temporary enforcement policy, pending the issuance of additional guidance by the DOL.
The FAB states that during the period from June 9, 2017 until after regulations or prohibited transaction exemptions or other administrative guidance have been issued, neither the DOL nor IRS will pursue prohibited transactions against investment advice fiduciaries who are working diligently and in good faith to comply with the impartial conduct standards for transactions that would have been exempted in the Best Interest Contract (BIC) and Principal Transactions Exemptions, or treat such fiduciaries as violating the applicable prohibited transaction rules.
Investment advice fiduciaries may also continue to rely upon other available exemptions, but neither the IRS nor the DOL would treat an adviser’s failure to rely upon such other exemptions as resulting in a prohibited transaction violation if the adviser satisfied the terms of the temporary enforcement policy.
The need for this guidance was prompted by expected issuance today of a mandate from the U.S. Court of Appeals for the Fifth Circuit effectuating its opinion vacating the entire Fiduciary Rule, the BIC Exemption, the Principal Transactions Exemption, and related amendments to existing prohibited transaction exemptions.
The DOL recognized that this decision left a number of open questions, with respect to which it intends to provide additional guidance in the future. However, as an immediate step, it wanted to provide guidance as to the breadth of the prohibited transaction exemptions that remain available for investment advice fiduciaries. Of course, with the Fiduciary Rule vacated, the number of individuals who may be investment advice fiduciaries will be significantly reduced.
The FAB does not preclude the DOL from asking the Supreme Court to review the decision of the Fifth Circuit, although that course of action now seems unlikely. Also, the temporary enforcement policy of the DOL and IRS does not affect the rights or obligations of other parties, but, in light of the Fifth Circuit decision, actions by other parties would seem less likely. It will also be interesting to see how the DOL crafts additional guidance in a manner consistent with the Fifth Circuit decision.
The FAB is somewhat difficult to understand. As mentioned above, the DOL expects the Fiduciary Rule and related exemptions to be vacated by the Fifth Circuit May 7. Once the Fifth Circuit takes action, there will be no rule or exemptions upon which to apply a temporary enforcement policy. FAB’s extension of the policy beyond today, until after “regulations or exemptions or other administrative guidance has been issued,” is confusing and, if true, will be contrary to the Fifth Circuit’s decision.
© 2018 Wagner Law Group.
Unequal plan coverage persists, report shows
The benefits of tax-deferred savings plans in the U.S., though nominally available to all Americans, accrue disproportionately to workers who are white, well-educated, and have salaries that enable them to save, the data in a recent report from the Employee Benefits Research Institute show.
The report, like some previous EBRI reports, that people who contribute to IRAs, Keogh accounts 401(k) plans have a much better chance for a secure retirement. But the data indicate only a correlation between the two. Access to a plan and the ability to save might merely be markers for economic success in general.
Demographic disparities in plan coverage and usage, the EBRI data show, echo other disparities in the workplace, where minority and lower-income workers are concentrated in smaller businesses that, besides offering lower salaries and shorter job tenures, rarely offer retirement savings plans.
This is the much talked-about “coverage gap” that state-sponsored IRAs and retirement plan marketplaces are trying to narrow, that provides opportunity for robo-advice startups, and which some large financial services firms hope to address by sponsoring low-cost, low-maintenance multi-employer plans (which will require changes in pension laws).
“A number of demographic differences have persisted over the six survey periods: the increased likelihood of plan participation with higher levels of family income (above $10,000), net worth, and educational attainment,” said the report, entitled Individual Account Retirement Plans: An Analysis of the 2016 Survey of Consumer Finances.
“For example, in 2016, the participation rate was just 47.3% of family heads with annual family income of $10,000 – $24,999, compared with 89.9% for those with annual family income of $100,000 or more. Additionally, racial disparities existed; white family heads were more likely to participate when eligible than nonwhite family heads.”
The same pattern held for accumulation levels. “Among all families with an IRA/Keogh in 2016, the median balance was $53,000, the report said. “This was a 109% increase from the 1992 value of $25,401 and a 3% increase from the 2013 value of $51,555.
“The median IRA/Keogh balance increased in 2016 with family income, family head age, and family net worth—a pattern that held true in 1992–2013… [The] median balance of families with a white family head that had IRA/Keoghs was $62,000 in 2016, compared with $23,000 for families without a white family head.”
The report goes on to say, “Among families with an IRA/Keogh plan, the average value of their account holdings was $203,904 in 2016, a 2% real increase from $199,934 in 2013. From 1992–2016, the average IRA/Keogh balance increased 228%, from $62,147 (in 2016 dollars) in 1992. The factors related to higher average IRA/Keogh balances were higher family income, older family head, higher educational level of the family head, white family head, and higher net worth.”
The concentration of plan usage and accumulations among more successful workers was a topic of debate during the run-up to the passage of the 2016 tax reform package. Seeing that a majority of the benefits of tax deferral were going primarily to a minority of workers, some legislators suggested that the tax benefits be curtailed, at least for those who contributed the most to the plans.
But lobbying by the retirement industry, and a tweeted promise by President Trump not to change the 401(k), led to a continuation of current retirement tax policy under the new law.
© 2018 RIJ Publishing LLC. All rights reserved.
AXA IPO attracts $2.75 billion
French insurer AXA SA’s initial public offering (IPO) of its U.S. division raised $2.75 billion by pricing at $20 per share on Wednesday, below its targeted range of $24-27 per share, Reuters reported Wednesday. Despite coming in below target, it is still the biggest U.S. IPO so far in 2018 based on proceeds raised.
AXA, which is Europe’s second-biggest insurer by market capitalization behind Allianz, has said that the proceeds will help finance its earlier acquisition of insurer XL Group.
It is the second U.S. insurance IPO this year to price below its target range, after Goosehead Insurance Inc last month.
Investors have previously voiced concerns over the exposure of many U.S. insurers to the long-term care (LTC) industry. LTC is insurance coverage that pays out for end-of-life medical care, or when a person needs assistance bathing or feeding themselves.
The U.S. arm of AXA, dubbed AXA Equitable Holdings Inc., offers such protection to clients through a rider on life insurance products. It is one of America’s oldest life insurers, with roots going back to 1859 in New York. AXA acquired the business in 1992.
AXA Equitable Holdings offered 137.25 million shares in its IPO. The listing values the U.S. entity at $11.22 billion.
The source asked not to be identified ahead of an official announcement. A spokeswoman for AXA did not immediately respond to a request for comment. Morgan Stanley, JP Morgan, Barclays and Citigroup are the main investment banks involved in the IPO.
© 2018 Reuters.
Honorable Mention
Principal to repurchase more shares
Principal Financial Group’s board of directors has approved a new authorization for the repurchase of up to $300 million of the company’s outstanding common stock. As of March 31, 2018, approximately $96 million remained under the company’s May 17, 2017 $250 million authorization.
The repurchases will be made in the open market or through privately negotiated transactions, depending on market conditions. The stock repurchase program may be modified, extended or terminated at any time by the board of directors. Principal Financial Group, Inc. had approximately 286.4 million shares of common stock outstanding as of April 25, 2018, per the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2018.
“This authorization supports our continued balanced approach to capital deployment to create long-term value for our shareholders – through common stock dividends, share repurchases, and strategic acquisitions,” said Dan Houston, chairman, president and CEO of Principal. “As we previously announced on our 2018 outlook call, we anticipate deploying $900 million to $1.3 billion of capital in 2018. This action reflects our continued confidence in the underlying strength of our diversified and integrated business model.”
Financial wellness is doing well: Prudential
Among the employers recently surveyed by Prudential Financial’s Workplace Solutions Group, 83% offer financial wellness programs, up from 20% in the survey two years earlier. Another 14% of employers say they plan to offer these programs in the next one or two years, the survey showed.
The survey included responses from nearly 800 decision makers for group insurance benefits at U.S. businesses with at least 100 full-time employees.
Prudential’s survey examines varying employer attitudes about financial wellness, as well as common types of financial wellness programs, top metrics of success and potential barriers to implementation:
- Employers who offer financial wellness are more satisfied with their total benefits program (61%), than those who do not (44%).
- Larger employers were more satisfied with their financial wellness offerings (72%) than medium (54%) or small employers (50%).
- Most large employers (61%) believe data sharing is employees’ biggest barrier to participation in financial wellness programs, citing “privacy concerns” and “putting together all the data and information.”
- Overall, retirement plan and benefit providers are the preferred providers of financial wellness.
- Criteria for selecting financial wellness providers are primarily driven by cost, ease of implementation and expertise.
- Employers continue to have a paternalistic view of their overall employee benefits
- Despite recent shifts in employment toward gig and other alternative work arrangements, the survey finds the majority of employers are committed to offering employee benefits.
- “Attract and retain talent, improve employee productivity, and assure employees” are the three most critical outcomes employers want their benefits strategies to achieve.
- Sixty% of employers think they should provide benefits to employees; only 15% say employees should be responsible for their own financial well-being and future.
- Almost two-thirds (64%) believe their employees are highly satisfied with their overall benefits package, up from 41% in the previous survey.
- A third of employers say they should pay all the costs of the employee benefits they offer.
According to the survey, employers primarily rely on employees to tell them what types of financial wellness programs they need and how to measure the success of the programs. Methods used include surveys and informal feedback, analysis of internal data around 401(k) loans or withdrawals, as well as wage garnishments. More than two-thirds measure the impact of their financial wellness programs at least quarterly.
Piwowar leaves SEC
SEC Commissioner Michael Piwowar plans to step down from his post on July 7, after serving nearly five years on the five-person commission, according to a statement posted on the SEC website.
Piwowar, a Republican, has been an outspoken critic of the Department of Labor’s fiduciary rule.
“To me, that rule, it was about one thing and it was about enabling trial lawyers to increase profits,” Piwowar said last year while acting SEC chairman.
And although he voted with three other commissioners to move forward on a proposal to raise standards of conduct for brokers and advisors, he expressed misgivings that the rule, particularly its length at more than 1,000 pages.
The SEC is currently taking comments on that proposal.
Piwowar’s departure will leave the agency with four commissioners, which might deadlock votes if the SEC’s two Democrats oppose measures favored by Chairman Jay Clayton, a Trump administration appointee, according to The Wall Street Journal.
“It has been an honor to serve the American people at such a respected agency and work with such dedicated and talented staff,” Piwower wrote in a resignation letter to President Trump posted on the SEC’s website. In it, he expressed gratitude for having been appointed acting SEC chairman at the beginning of Trump’s administration, noting that “we accomplished a great deal for the ‘forgotten investor’ in a short period of time.”
An email to the SEC for additional comment was referred to the statement on the SEC’s website.
As acting SEC chairman, Piwowar “made waves” the Journal said when he called for abolishing rules that prevent most households and individuals from investing in startups and other private companies, arguing that these investment opportunities should not be reserved for ventures capitalists and millionaires.
Piwowar joined the SEC in 2013 from Capitol Hill, where he served as the chief Republican economist on the Senate Banking Committee. He also worked as a White House economist earlier in his career.
As a commissioner, Piwower used procedural tactics to block some votes on Dodd-Frank rules toward the end of the Obama administration, when due to other resignations, the agency has only three members, the Journal reported.
Piwowar’s term officially ends on June 5. He will resign his position on July 7 unless his successor is sworn in before then. He did not disclose what he plans to do after leaving the SEC in either the resignation letter or the accompanying statement on the SEC website.
Prudential in $1.2 billion longevity reinsurance deal
In their sixth longevity reinsurance transaction since 2015, Prudential Insurance Company of America (PICA), is assuming the longevity risk for £900 million (about $1.2 billion) in pension liabilities of Pension Insurance Corporation plc, associated with about 7,500 retirees in two pension plans.
The announcement was made by Prudential Retirement, a unit of Prudential Financial. The two firms concluded their last longevity reinsurance agreement in November 2017. Overall, they have come to agreements collectively worth more than $6 billion (about £4.4 billion).
“This agreement signals strong demand for longevity reinsurance in the U.K., especially as a result of the growing desire among companies to de-risk their pensions,” said a press release.
“This desire has become more achievable due to the improved funding levels of U.K. schemes, many of which have spent several years progressively de-risking their liabilities. They are now well placed to do a buyout or buy-in. PIC and Prudential have long been leaders and innovators in providing de-risking solutions.”
FedEx buys $6 billion group annuity from Metlife
FedEx, the overnight package shipping giant, said this week that it wlll purchase a group annuity contract from and transfer approximately $6 billion of the company’s U.S. pension plan obligations to Metropolitan Life Insurance Company, or Metlife.
The annuity purchase will transfer responsibility for pension benefits to Metlife for about 41,000 FedEx retirees and beneficiaries who currently receive a monthly benefit from participating FedEx tax-qualified U.S. domestic pension plans, and meet other conditions.
There will be no change to the pension benefits for any plan participants as a result of the transaction. Details will be provided to retired participants and beneficiaries whose continuing payments will be fulfilled by Metropolitan Life. The transaction, which is subject to certain closing conditions, is expected to close on May 10, 2018.
“This transaction better positions FedEx to manage future pension plan costs, and retirees will receive the same pension benefit from a highly rated insurance company. Transferred pension benefits will be protected by the State Guaranty Association in the state where the retirees live.” said Alan B. Graf, Jr., executive vice president and CFO, FedEx Corp, in a press release.
By transferring these obligations to Metropolitan Life, FedEx will reduce its U.S. pension plan liabilities by approximately $6 billion. The purchase of the group annuity contract will be funded directly by assets of the Pension Plans. Following the annuity purchase and transfer, the Pension Plans will remain well funded.
As a result of the transaction, FedEx expects to recognize a one-time non-cash pension settlement charge, which will be included in the fiscal 2018 year-end mark-to-market pension accounting adjustments that will be reported in the company’s fiscal 2018 fourth quarter earnings release.
During the 2017 and 2018 fiscal years, FedEx made voluntary contributions of $4.5 billion to the Pension Plans, including the most recent contribution of $1.5 billion following the U.S. Tax Cuts and Jobs Act, which was enacted in December 2017.
Nationwide funds fintech firms
Nationwide is making a new venture capital investment in Betterview to enhance its ability to write business and service claims leveraging artificial intelligence (AI) and drone technology, the Columbus-based insurer announced this week. The investment is part of Nationwide’s commitment to finance more than $100 million of venture capital in customer-centric solutions.
With the new investment in Betterview, Nationwide’s venture capital team has made nine investments to date, including Nexar, Matic, blooom, Insurify, Next Insurance, and Sure.
“Drones and artificial intelligence will play a critical role in meeting the needs of our customers in the future of both underwriting and claims response. It’s why we’re so excited about this partnership with Betterview,” said Scott Sanchez, Nationwide’s chief innovation officer. “These capabilities will drive faster response in the wake of catastrophic events, enhanced underwriting sophistication for day-to-day business and a better overall experience for our members.”
The investment is being used to “extend Betterview’s machine learning platform across additional data sources to unlock valuable insight about commercial and residential properties for P&C insurers and reinsurers,” said a Nationwide release.
“Betterview’s machine learning platform, generates data and analytics on building and property conditions, characteristics, and potential hazards by analyzing satellite, aerial, and drone imagery. This information can be used throughout an organization, from loss control and underwriting, to claims and catastrophe response.”
In the release, Erik Ross, leader of Nationwide’s venture capital team, said, “When we first met the [Betterment] team, their sole focus was on using drones to transform how buildings and properties were inspected. They have since evolved by enhancing artificial intelligence capabilities, building a mobile app, developing a roof risk score, and integrating various third-party data providers to put historical weather, property hazard risks, and building information at the customer’s fingertips.”
© 2018 RIJ Publishing LLC. All rights reserved.
Fiduciary rule litigation isn’t over
Even though the Trump Department of Labor hasn’t contested the decision by the Fifth Circuit Court of Appeals to void the Obama administration’s fiduciary rule (at the behest of financial services industry groups), the legal battle over the contentious rule isn’t quite over.
AARP’s legal team has petitioned the entire banc of more than a dozen judges in the Fifth Circuit to re-hear the case, which had been decided by the 2 to 1 vote of a three-judge panel. A motion to dismiss that petition was subsequently filed by the industry groups, including the American Council of Life Insurers and the Insured Retirement Institute.
In its petition, AARP’s attorneys argued:
The panel majority’s decision is grounded on a faulty foundation. Although it correctly invoked the understanding that Congress intended for the courts to look to the common law of trusts to define the responsibilities of a person once he becomes an ERISA fiduciary, it impermissibly redefined that understanding as addressing who is a fiduciary.
The Supreme Court has repeatedly rejected this approach. As the Court has acknowledged, Congress “defin[ed] ‘fiduciary’ not in terms of formal trusteeship but in functional terms of control and authority over the plan,” see 29 U.S.C. § 1002(21)(A), “thus expanding the universe of persons subject to fiduciary duties.”
Attorneys for the industry groups countered:
This Court should deny the Motion of AARP to Intervene and Motion to Intervene of the States of California, New York, and Oregon for numerous reasons. First, the Movants do not satisfy the standard for emergency relief. Second, they lack standing.
Third, the Motions are untimely and fail to satisfy the other standards for intervention on appeal. In short, Movants’ improper, last-minute motions do not come close to justifying their unprecedented bid to intervene for purposes of filing a motion for rehearing en banc, itself an exceptional motion which this Court’s rules firmly discourage—even when filed by a long-standing party to the proceedings.
What’s at stake here? Tens of billions of dollars in potential commissions for selling mutual funds and annuities to rollover IRA owners.
If the original DOL rule had been upheld by the Fifth Circuit, access by commission-paid investment advisors, brokers and agents to the trillions of dollars now held in brokerage-based rollover IRAs would have been curtailed.
Their “conflicted” sales—sales driven by their own business needs and goals—would have been subject to class-action litigation. Only intermediaries who pledged not to act in their own interest would have been allowed to recommend products to IRA clients.
© 2018 RIJ Publishing LLC. All rights reserved.
The Link Between Age and Wealth
The Bucket Brigade
For advisors who build lifelong income streams out of insurance and investment products, the best possible planning method may be time-segmentation, or “bucketing.” There’s no clear academic basis for that claim, but it feels accurate.
There’s no proof that bucketing works either, for that matter, but some advisors swear by it. It seems to work especially well for “constrained” retirees who, rich or poor, don’t have quite enough savings to finance the type of retirement lifestyle they’ve imagined.
“The Constrained Investor,” aptly, was the title for a conference about bucketing held this week at the historic Omni Parker House Hotel in Boston. More than 100 decumulation-oriented advisors from all over the US gathered there to learn how other advisors have used time-segmentation to improve and expand their practices.
The conference was hosted by Wealth2k, the company that markets and supports a segmented planning method called Income for Life Model (ILFM). Securities America, a broker/dealer based in Omaha that makes IFLM available to the 2,800 or so advisors who use its platform services, sponsored the meeting.
At its core, bucketing may rely more on behavioral finance than on financial engineering. A quantitative analyst might dismiss it as just a “mental accounting” technique for unsophisticated clients. But for kitchen table advisors, that’s precisely its appeal. It helps advisors divide retirement into graspable chunks of time and money and keeps clients calm during volatile markets.
Bucket strategies
A quick definition of time-segmentation might be useful here, especially for advisors who use systematic withdrawals from total return portfolios to generate income for retired clients. Instead of organizing a client’s assets into types of accounts (qualified vs. non-qualified vs. Roth) or into classes (stocks, bonds and cash), a bucketer assigns assets to time periods.
A typical bucketing practice would involve three to seven buckets, whose assets will be liquidated for income at certain dates during retirement. Practitioners would put cash equivalents or short-term bonds in near-term buckets, intermediate bonds in buckets that won’t be tapped for three to five years, and balanced funds or equities in distant buckets. The assumption is that the assets in each bucket will appreciate over time at historical rates; they rarely do, so the advisor needs to monitor their progress and tweak them from time to time.
From left: Marc Geels, Sam Marrella, John Shrewsbury and Albin Campbell.
Here’s a real-world example offered by conference speaker John Shrewsbury, owner of GenWealth Financial Advisors, a 12-advisor, $400 million practice in Little Rock, Arkansas. He created a series of six five-year buckets for a couple with $1 million in savings. He put about $144,790 in bonds of under five years duration in Bucket One, $137,739 in bonds of slightly longer duration in Bucket Two, and $113,642 in the diversified Franklin Income Fund in Bucket Three. Buckets Four, Five and Six received $89,435, $64,288 and $73,600, respectively, in LPL Model Wealth Portfolios.
The remaining $377,000 was used to buy variable annuities with living benefits, to supplement the guaranteed income provided by Social Security. Shrewsbury said he buys most of his variable annuities from Jackson National, Lincoln Financial and Prudential.
The final step is to put money in the client’s hands. “We set up a joint brokerage account for the husband and wife,” Shrewsbury said. “Every year we distribute a year’s worth of cash to the brokerage account and then every month send money from the brokerage to the checking account.”
Structure to darkness
But the meeting, and bucketing itself, had as much or more to do with marketing and client relationships than it did with investments or insurance. Bucketing seems to lend structure to the retirement journey, which for retirees can feel like rowing across a lake in utter darkness, not knowing how near or far the other side is.
The successful advisors who spoke at the conference—Marc Geels of Sioux City, Iowa, Sam Marrella of Reading, Pa., Albin Campbell of Detroit, Mich., and Shrewsbury—clearly owed much of their success to marketing and brand-building activities. They shared their techniques with attendees.
Geels, the owner of EFS Group Wealth Management and an IFLM user since 2006, had the audience scribbling notes as he rattled off a long list of creative marketing practices. At Christmas, he buys 100 poinsettias and gives them to clients. He hosts wine tastings, document shredding parties, golf outings, and meet-ups for car collectors. Don’t bother hosting seminars in June, July, August or December, he said.
For $2,000 a month, he buys four half-hour slots of radio time for a Sunday morning talk show. Twenty-eight of his top clients sit on his Client Advisory Board, serving three year terms and meeting for dinner twice a year. “It’s pretty tough to leave your advisor if you’re part of his board,” Geels said, a comment that drew murmurs of approval from the crowd.
Albin Campbell said he specializes in the “constrained mass affluent space,” so for decades he’s been giving talks at community banks, credit unions, United Auto Worker meetings, at workplaces. “The unions and the employers market for me, and make sure people show up for me,” he said. Sam Marrella writes books. Shrewsbury does radio, podcasts, TV, articles and events. “We’re marketers, not investment advisors,” he said.
Be an educator
Bucketing also seems to help advisors tell stories that illustrate complex financial concepts and foster the kind of trust that ultimately helps close sales. Perhaps because “bucketing” itself is a metaphor, it leads easily into the creation of new metaphors.
Perhaps the most common metaphor associated with time-segmentation is the house metaphor. Shrewsbury likes to weave stories around the importance of establishing a “foundation” of safe income on which a “living room” and ultimately an “attic” can be built. “The attic,” he said, “is where we store things that we intend to leave behind.”
“IFLM allows me to tell a story,” said Campbell. “I like a structured presentation, and IFLM gave me one. It makes me look bigger than I am. My story is Social Security plus IFLM.” He finds that people are looking for an educator and he’s able to position himself as one.
“I talk to clients about how I have this huge platform at my disposal, with 10 strategists I can call on,” said Shrewsbury. I tell them I’m the conductor of the orchestra, and I try to make the strings, the brass and the drums all sound good together. I say, ‘I want to be the conductor of the orchestra of your retirement.’” He likes to hand new clients a leather-bound binder and say, “Here’s a three-ring binder for the three-ring circus of your retirement.”
David Macchia
Anti-commoditization cloak
Macchia, whose company, Wealth2k, licenses the IFLM method to broker-dealers and supports it with a variety of multi-media marketing tools for advisors, likes to position retirement income planning and bucketing as ways for advisors to differentiate themselves from competitors and add value in a world where investment advice is becoming a robo-driven commodity.
“Time segmentation combined with flooring creates the ideal income strategy for constrained investor retirees,” Macchia said. “This is what Wealth2k calls ‘Hybrid Time-Segmentation.'” Millions of constrained American investors, who collectively have about $6 trillion in savings, suffer from “income disease,” he told the bucketers filling the Parker House ballroom. “They have no plan, no clue how much they can safely spend in retirement, and therefore have little chance of having a consistent standard of living in retirement. You have the cure to income disease. It’s the signature business opportunity of our careers.”
© 2018 RIJ Publishing LLC. All rights reserved.
The ‘Coverage War’ Begins
There’s a turf war brewing over retirement savings plans in America. Public policy wonks and 401(k) trade groups agree that millions of workers don’t have access to an employer-sponsored plan. But they disagree on who should be spearheading the solution and, to use industry jargon, “expand coverage.”
The trade groups would naturally prefer to see the private sector capture the opportunity that this underserved sector presents, and they’d rather deal with just one regulatory body, such as Uncle Sam, instead of 50 state legislatures.
But so far they’ve been frustrated–most recently by Congress’ failure to enact the Retirement Enhancement & Savings Act in March. RESA would have allowed financial services companies to sponsor their own national multi-employer plans.
Meanwhile, state governments, particularly where Democrats hold power, have moved ahead by offering various “public options.” These have taken the form of state-sponsored Roth IRAs (in California and Oregon) or state-supervised marketplaces where employees and employers can meet providers (in Washington State and Vermont).
The states have been slowed but not stopped by the Republican Congress, which in 2017 killed the MyRA program (a federal Roth IRA that would have helped state Roth IRAs get rolling) in its cradle and reversed a Department of Labor ruling that would have exempted the state plans from federal control.
But some states are still proceeding with their plans for public options. Some 11 US states have approved their own retirement savings plans – the latest being New York. But Oregon was the first to enroll employers and employees, having started in October 2017. As of early April 2018, 509 employers had registered and 77% of 38,150 eligible employees had enrolled in OregonSaves, according to a report published this week by IPE.com.
These state-run plans are designed for employees who do not have access to retirement-plan coverage at work. According to AARP, the advocacy group for older Americans, 55 million full and part-time private-sector workers have this problem.
In Oregon, about one million residents are estimated to be this situation. Two thirds of Oregon’s 64,000 employers will be affected by OregonSaves, as they do not offer a retirement savings plan, according to the Center for Retirement Research at Boston College. Of those, only 18% have ten or more employees but they represent 78% of the employees affected by OregonSaves.
Employers that do not offer a retirement plan must join the program, even though there is no penalty for those that fail to comply. Employees are automatically enrolled and their contributions automatically escalated, as in the Save More Tomorrow (SMarT) program recommended by Nobel laureate Richard Thaler and Shlomo Benartzi, but they can opt out.
The independent provider Ascensus will undertake the recordkeeping and administration chores, including creating and maintaining the website, managing the call center and the relationship with State Street Global Advisors (SSGA), the investment manager for the program. SSGA was selected through a public process with the assistance of Segal Marco Advisors.
Implementation of OregonSaves is in four waves, depending on size of company:
- October 2017: Companies with more than 100 employees
- April 2018: 50-99 employees
- November 2018: 20-49 employees
- 2020: All companies, including those with 19 employees or fewer
Some Oregonian companies that are already members of the ERISA Industry Committee and offer plans, including 401(k)s, have sued Oregon State for the employer reporting requirement. They settled last March and are exempt from reporting if they inform the state of their ERISA membership and the state verifies this membership.
The state has also made hundreds of presentations to chambers of commerce, business associations, and trade groups to promote awareness.
Additional materials are also available for employers to pass to employees, including a simple retirement calculator, and education sessions are planned.
The initial contribution rate is 5% of salary. This will be automatically increased at the rate of 1% of compensation in January each year to a maximum of 10%. The account structure is a Roth IRA and contributions occur on a post-tax basis. The program currently offers three types of investment options.
The first $1,000 is invested in the OregonSaves Capital Preservation fund – a money market fund. All further contributions are invested in a target retirement fund based on age and year of retirement. The third option is an SSGA US large-cap equity index fund. OregonSaves participants can make their own choices regarding contribution levels.
Costs are about 1% and include all expenses and fund fees. According to the Oregon State Treasury, an analysis of state auto-IRA fees by the Pew Charitable Trusts found that they are competitive, even when compared to the lowest cost 401(k) plans for small businesses. Oregon aims to decrease cost levels over time as assets increase and start-up costs are recouped.
© 2018 RIJ Publishing LLC. All rights reserved.
Financial Engines purchased by private equity firm
In a sign of further consolidation in the investment management business, Hellman & Friedman agreed to acquire Financial Engines, the Sunnyvale, Calif.-based advisory firm co-founded in 1996 by Nobel Prize-winning economist Bill Sharpe, for $3 billion.
The San Francisco-based private equity firm is paying $45 a share. Shares of Financial Engines, which has been called the original “robo-advisor,” rose 32% to $44.73 at 2:42 p.m. in New York trading last Monday, according to Bloomberg.
Life insurers, asset managers and private equity firms are buying investment managers as the sector automates and margins collapse. Investors increasingly rely on computers—rather than people—for money advice. The industry also faces the costs of complying with new rules in the U.S. and Europe aimed at improving fee transparency.
There were 208 asset management deals worth $21 billion in 2017, according to a research note in February from Sandler O’Neill & Partners, an investment banking firm. Combined deal values were up about 23% from the previous year.
The Financial Engines transaction is the fourth-largest takeover of an asset or wealth manager since the beginning of 2017, according to data compiled by Bloomberg. Others were:
- Standard Life Plc’s mergerwith Aberdeen Asset Management Plc to form the U.K.’s largest active manager in a $4.5 billion deal.
- Jiangsu Shagang Co.’s proposal to buy Suzhou Qinfeng Investment Management Co. for more than $3 billion
- Softbank Group’s $3.1 billion cash dealfor Fortress Investment Group LLC
- The acquisition by Aberdeen Standard Investments, Standard Life Aberdeen Plc’s money manager, of the U.S. business of ETF Securities, which specializes in precious metals and commodity exchange-traded products and has about $2.8 billion in assets
- Nippon Life’s purchase of a near-25% stake in Los Angeles-based money manager TCW Group Inc. from Carlyle Group LP in a deal valued at 55 billion yen ($500 million)
Financial Engines primarily helps companies offer their employees 401(k) plans, individual retirement accounts and other types of savings plans. As of Dec. 31, it provided those services to more than 700 employers, representing about 9.8 million workers and more than $1.2 trillion in assets, according to its annual report. It also manages more defined contribution accounts than rivals including Morningstar Inc. and Fidelity Investments, according to an investor presentation in February.
The company earned $47 million last year, or 63% more than in 2016, as its purchase of the Mutual Fund Store drove revenue higher. Co-founded in 1996 by economist William Sharpe, Financial Engines went public in 2010.
Hellman & Friedman has a history of investing in money managers. In the past it has owned stakes in Artisan Partners Asset Management Inc., LPL Financial Holdings Inc. and Franklin Resources Inc., according to Hellman & Friedman’s website.
© 2018 RIJ Publishing LLC. All rights reserved.
Undersaved? Work a little longer
Working a little longer, and postponing the start of Social Security benefits, can partly make up for under-saving over several decades of work, according to a recent article from the National Bureau of Economic Research, “The Power of Working Longer.”
The study’s authors found that working only three to six months longer boosts retirement income by as much as increasing retirement contributions by one percentage point over 30 years of employment. For a 62-year-old, working until age 70 would increase retirement income by at least 40% percent and more than 100% for some individuals.
“The results are unequivocal,” the paper said. “Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer. The longer work can be sustained, the higher the retirement standard of living.”
The finding applies to single adults and the primary earner of married couples, and across a broad range of earnings levels, wrote authors Gila Bronshtein, Jason Scott, John B. Shoven and Sita N. Slavov.
Older workers who are 10 years away from retirement and who decide to work one month longer at the end of their careers can get the same increase in retirement income as they can by adding one percentage point to their retirement saving rate over 10 years.
The findings are considered to be of special relevance to older workers, who may not be able to save more or have time to benefit from switching to a low-cost portfolio.
Additional years or even just months of work allow workers to contribute more to their retirement accounts. Delaying withdrawals from those accounts allows more time for them to grow. Waiting longer before buying an annuity means the annuity will be cheaper. (The researchers assume that at retirement a worker buys an inflation-indexed joint survivor life annuity, in part because it harmonizes the benefits of private savings and Social Security, which is also an inflation-indexed, joint-survivor annuity.)
The largest factor, however, is the increase in Social Security benefits from claiming later. If an average 66-year-old works one year longer, and claims Social Security at age 67, he or she will see a 7.75% rise in annual retirement income, the researchers calculate. Some 83% of the gain comes from the rise in Social Security benefits.
The lower one’s income, the larger the gain in Social Security benefits from additional earnings. A lower wage worker needs to work only 2.1 months longer to equal the benefit of 30 years of saving an extra percentage point of income, while a higher wage earner has to work 4.4 months longer to get the same benefit.
© 2018 RIJ Publishing LLC. All rights reserved.
Honorable Mention
Principal in financial wellness deal
Principal Financial Group is partnering with ARAG, a leader in legal insurance, to roll out access to a legal document resource for retirement plan participants. This resource had previously only been available to group life insurance customers as part of the financial wellness resources Principal makes available to help people manage their financial future.
“With this new relationship, people can now take immediate action regarding their financial wellness and risk planning by preparing a will, healthcare power of attorney and more,” a Principal release said.
Many Americans report struggling with risk and protection planning, the release said. Only 26% of Americans have a complete will that is up to date and 71% don’t know how to get started with legal matters.
For individuals looking for a place to get started with risk planning, Principal, along with ARAG, provides education and resources. Once forms are filled out in the system, individuals can take steps to formalize their plan, often by taking their documents to a notary.
Lincoln Financial completes acquisition
Lincoln Financial Group has completed its previously announced acquisition of Liberty Life Assurance Company of Boston, expanding its benefits market position across all size employers. The transaction included reinsuring Liberty’s Individual Life and Annuity business to Protective Life Insurance Company.
With this acquisition, Lincoln Financial ranks first in market share in combined fully insured disability sales and third in combined total life and fully insured disability sales. Its group benefits organization now serves approximately 10 million employee customers across the U.S., through product offerings that include Disability, Life, Dental, Vision, Critical Illness, and Accident insurance, plus a full suite of absence management services.
The acquisition was financed with cash and the issuance of debt and is expected to be accretive to Lincoln Financial’s earnings per share in 2019, excluding integration costs.
Goldman Sachs & Co. LLC acted as financial advisor to Lincoln Financial and Wachtell, Lipton, Rosen & Katz and Sidley Austin LLP acted as legal advisors. Barclays acted as financial advisor to Liberty Mutual, and Skadden, Arps, Slate, Meagher, & Flom LLP acted as legal advisor.
Protective Life Corporation, a unit of Dai-ichi Life Holdings, Inc., said that its principal subsidiary, Protective Life Insurance Co., and Protective Life & Annuity Insurance Co., completed the transaction with Lincoln Financial Group to acquire via reinsurance substantially all of the individual life and annuity business of Liberty Life Assurance Company of Boston.
The reinsurance transaction closed in conjunction with Lincoln’s acquisition of Liberty Life from affiliates of Liberty Mutual Group Inc. The transaction was originally announced on January 19, 2018. The transaction is expected to represent a capital investment by Protective of approximately $1.2 billion.
© 2018 RIJ Publishing LLC. All rights reserved.
The link between 401(k) litigation and in-plan annuities
So-called “401(k) lawsuits” have roiled the retirement industry in recent years. They’ve disrupted revenue-sharing practices in workplace savings plans, generated a windfall for a handful plaintiffs attorneys, and forced plan sponsors to take their duties as fiduciaries more seriously.
The suits may also have made plan sponsors warier than ever about offering an annuity as an investment option inside their plans. If so, that might disappoint those who hoped to see 401(k) balances serve as a direct source of guaranteed lifetime income.
This assessment is mentioned (though not examined in depth) in a new Issue Brief from the Center for Retirement Research (CRR) at Boston College. ERISA lawyers in particular should appreciate this article: The paper’s appendix compiles the hundreds of 401(k) lawsuits brought in the past decade..
Here’s what George S. Mellman, an institutional investment consultant, and Geoffrey Sanzenbacher, a CRR analyst, wrote about in-plan annuities:
“One open question is whether the fear of litigation prevents the use of creative options that may improve participant outcomes – like investment vehicles designed to provide a lifetime income stream when participants retire.
“So far, these options have not caught on and it is unclear what role litigation has played. After all, offering an annuity option would involve more complexity than passive investments (and thus higher fees) and would require the plan to choose a provider, which itself entails some risk.
“Yet, such options would likely improve retirement security. To the extent the fear of litigation does play a role, retirees may benefit from more government clarification on how plans can offer drawdown products in ways that protect them from any legal consequences.”
The balance of the report is dedicated to a review of the complaints that motivated the lawsuits and the impact that the threat of litigation is having on the retirement plan industry. The report documents a rise in the use of low-cost index funds and a decline in investment and administrative expenses as results of litigation.
In a recent email to RIJ, Mellman offered these comments:
“For awhile, I’ve been curious about why there’s been so little implementation of in-plan annuity options,” he wrote.
“In 2014, the Treasury Department, IRS, and DOL issued guidance on how deferred income annuities could be included in target-date funds. Plan sponsors and their consultants know both that older workers worry about post-retirement cash flows and market volatility, and that many near-retirees were totally unprepared during the economic crisis ten years ago when nearly all asset prices collapsed.
“So, despite the needs and potential availability of new in-plan annuity tools, I now wonder about the extent that plan sponsors’ litigation fears have stifled innovation. Especially since the onset of increased litigation, more plan sponsors have expressed fears of being on the ‘bleeding edge’ of investment lineup innovation, and this fear seems to be stronger than for innovation in other areas of plan design and plan operations.
“This is especially true for changes in investment offerings that don’t directly lower plan or participant costs—invariably, avoiding litigation is one of the reasons cited. A formal survey would be an appropriate follow-up activity.”
© 2018 RIJ Publishing LLC. All rights reserved.
A Social Security Trial Balloon
As many of us are painfully aware, our 83-year-old Social Security system faces a deadline. Only 16 years remain before its revenues will cover only about 75% of its promised payouts. Unless a credible fix emerges soon, we could end up with a hasty, 11th-hour patch-job in 2034. Even now, many Millennials expect a lump of coal at retirement.
One fresh proposal—among seven winning responses to a 2016 “AARP Policy Innovation Challenge”—calls for the creation of new savings accounts that would give Americans enough money to delay Social Security claiming until age 70 and thereby reap higher annual benefits for life.
(For a look at the seven (out of 20) winning proposals, click here.)
Warning for those sensitive to government-led solutions: The following proposal entails a government mandate, slightly higher payroll taxes, notional individual accounts, and a centrally managed, federally supervised pool of target date funds with limited pre-retirement liquidity.
The new accounts are called Supplemental Transition Accounts for Retirement, or STARTs. (They were conceived by Gary Koenig (below right), vice president of Financial Security at AARP’s Public Policy Institute, and
developed with assistance of Jason Fichtner, a former Social Security official now at the conservative Mercatus Center at George Mason University, and William Gale of the liberal Brookings Institution.
Big picture: There’s a battle shaping up over retirement policy, and whether the public sector or the private sector can, will, or should address the fact that as many as half of U.S. workers have no retirement savings option at work. California and Oregon have moved ahead with state-sponsored “auto-IRAs.” The private sector wants industry-led “open multiple-employer plans.”
STARTs are just one policy trial balloon, and here’s they would work:
- The accounts would be funded by employees and employers. There would be an additional government contribution for low-income households, paid for by taxing START distributions.
- Each worker and employer would contribute 1% of earnings (2% combined), up to the annual maximum subject to Social Security payroll tax ($127,500 in 2017), to the worker’s START. The federal government would contribute up to 1% to the STARTs of low-income workers. Employee contributions would be after-tax and employer contributions would be pretax.
- The self-employed would make required contributions as both employer and employee. For married couples, total contributions would be split equally between each spouse’s START.
- Retirees could only receive what they put in, plus investment gains. As a result, people closer to retirement would have smaller START accounts. The investment gains would not be “smoothed” or “buffered.” Individuals could have different outcomes and experience sequence-of-returns risk.
- Beneficiaries could begin to receive monthly START benefits at the earliest eligibility age (62, in most cases) but would not be required to do so. Each worker would be required to exhaust START assets before receiving Social Security benefits.
- The amount of monthly START benefits payable under the proposal would be limited to the Social Security benefits that the beneficiary would have received under current-law claiming rules.
- At full retirement age (age 67 for people born in 1960 or after) and up to age 70, beneficiaries could use START assets without restriction (e.g., taking a lump sum). At age 70, account holders with START assets would be required to take a full lump-sum distribution, or roll the balance into a retirement account or a beneficiary’s START. Any money remaining in a START at the time of the account owner’s death would go to a designated beneficiary.
In an interview this week with RIJ, AARP’s Gary Koenig said that the proposal is primarily intended to increase the adequacy of Social Security benefits through delayed claiming. But the STARTs would also reduce Social Security’s anticipated funding shortfall by about 12%.
“We’re not guaranteeing any specific return,” Koenig said. “An independent board would set the glide path. Then the funds would be privately managed, the way BlackRock manages the target date funds in the federal employees’ Thrift Savings Plan (TSP), but with multiple managers. We allow access to the account only if you have one of the serious health conditions that qualify for Social Security disability.”
Eugene Steuerle, a Social Security expert at the Urban Institute, said the START proposal would publicize the advantage of delaying Social Security benefits until age 70. “The proposal clearly tries to steer people to recognize what a good deal the current actuarial formulas provide for retirement,” he said.
“I like the idea of convincing people, at least under the current regime, that many of them ought to spend down existing monies (or, in the case of STARTs, mandatory monies) first so as to get the benefit of the delayed retirement credits and the actuarial benefits from not withdrawing before the normal retirement age.
“My main worry rests locking in parameters for decades into the future, e.g., on an early retirement age of 62 or even a normal retirement age in a world where we soon are expect to have 1/3 of adults retiring for close to 1/3 of their adult lives. Another issue is that the delayed retirement credit formula ought to be fixed and made more actuarially fair.”
Alicia Munnell, director of the Center for Retirement Research at Boston College, was skeptical about the likelihood of raising taxes, telling RIJ in an email that “Social Security deficits preclude spending money elsewhere.” In her column today at Marketplace.com, she wrote this about STARTs:
“Despite all the strengths of the proposal, it faces a tough future. Essentially, it raises the payroll tax rates by 2 percentage points and uses that money to start a new program rather than to close [Social Security’s] 2.83% [of taxable payroll] 75-year deficit. That is a tough sell.
“But STARTs made me think about other ways to use the proposal. What if, up until the full retirement age, people could not claim their Social Security benefits until they exhausted some portion—say, half—of their 401(k)/IRA balances? That requirement would counter people’s resistance to drawing down their nest egg and enable them to purchase the best annuity in town!”
About those government contributions: The maximum would be 1% of earnings for married couples filing jointly with adjusted gross income (AGI) less than $40,000, single filers with AGI less than $20,000, and head of household filers with AGI less than $30,000.
The government contribution would be phased out over an AGI range of $10,000, $7,500, and $5,000 for joint filers, head of household filers, and single filers, respectively. For example, the government contributions for joint filers with AGI of $42,500 would be 0.75% and with AGI of $45,000 would be 0.5%.
Workers in low-income households would receive a total START contribution of up to 3% of earnings. The government contribution would be treated like an employer contribution and would not be included in current taxable income.
© 2018 RIJ Publishing LLC. All rights reserved.
With FIA Caps, Higher is Better
After the financial crisis, the fixed indexed annuity (FIA) emerged from its original habitat in the independent insurance agent channel to compete against certificates of deposit in the bank channel and (when combined with an income rider) with variable annuities-with-living-benefits in the broker-dealer channel.
With its disarming marketing hook—equity-linked upside with no risk of loss—the FIA seems to answer the anxieties of sidelined investors. And recent retooling (into no-commission FIAs and “index-linked structured annuities”) has only broadened its appeal. Though the Department of Labor’s “fiduciary rule” has slowed FIA sales, the effect may be temporary.
But FIAs, which first appeared in 1995, have always been hard to benchmark. The product’s complexity, opacity and “manufactured returns” defy easy comparison. The best readily available public data is six years old—a study by Advantage Compendium showed an average annualized index annuity return of 3.27% over the period from 2007 to 2012. WINK (www.looktowink.com) produces a ton of information about FIAs for its subscribers, but not performance information. Anecdotally, FIAs have produced single-year returns as high as 12%.
Now CANNEX, the annuity data vendor, has released a report that measures the yields of commission-paying FIAs with a variety of crediting methods against the yields of multi-year guaranteed rate annuities (MYGAs). The report is entitled, “Accumulation Value of Fixed Annuities (MYGA & FIA): Understanding Yield by Product Design.”
CANNEX looked at 14 FIA products from six life insurance companies. Within that sample, the team “calculated the average annualized rate of return for each seven-year FIA contract… along with the distribution of returns across 10,000 market simulations for the S&P 500 Index.” The results were randomized rather than pulled from market history.
The report demonstrates—and this conclusion may feel self-evident—that contracts with the most generous performance caps and participation rates (or, better yet, no caps at all) do best against the MYGAs issued by the same companies when run through 10,000 Monte Carlo simulations of S&P500 Index returns.
The study depicts a horse race between MYGAs and FIAs as well as a horse race between FIA crediting strategies. (The analysts measured each FIA contract’s performance against the performance of the same issuer’s MYGA because the same interest rate assumptions presumably go into both.)
The results prove more or less what a lot of FIA watchers assume anyway: That the annual point-to-point method is best and that higher caps are better than low caps and no caps are better than a high cap—all else being equal (although all else is never equal).
The two contracts with uncapped S&P500 strategies in the study offered the highest returns relative to the MYGAs issued by the same two companies. Of those two, the contract with a higher participation rate (45% v. 40%) offered the highest average over seven years: 5.1% for the FIA v. 3.15% for the same company’s MYGA.
The products that on average tend to exceed the MYGA returns had the following strategies:
- Annual point-to-point with a higher rate cap (between 5.85% and 6.10%) and 100% index participation
- Annual point-to-point with no rate cap and an index participation rate less than 100%
- Average monthly return with a high rate cap (6.5%) and 100% index participation
The products that on average performed less well than their MYGA counterparts included these strategies:
- Annual point-to-point with a lower cap rate (between 4.00% and 4.50%) and 100% index participation
- Annual performance-triggered with a declared rate
- Monthly sum
On average, however, the differences between FIA and MYGA returns was thin, this study showed. When the team compared the averages with the yields of the most competitive seven-year MYGA return from the same carrier, they found an average for all seven-year MYGAs of 3.08% and for FIAs of 3.26%.
On the risk-reward spectrum, FIAs are evidently closer to fixed annuities than they are to equities. “People make such a strong connection between FIAs and equity indexes, but FIAs don’t perform like equities,” said Tamiko Toland, head of annuity research at CANNEX.
“They’re really a fixed product, and their performance is commensurate with fixed products. Our study gives you a range of returns, and shows that you could get less than a MYGA with an FIA. It depends on what your conviction is about the equities market. FIAs are for people who are willing to take more risk to get a higher yield than the MYGA offers.”
The CANNEX study was criticized by Sheryl Moore, CEO of WINK, which tracks sales and other data on indexed annuities. “As the recognized expert in the indexed annuity space, I put no salt in the findings in the CANNEX ‘research,’” she told RIJ in an email.
“This information is not consistent with my nearly 20 years of product administration, illustration development, and product development experience,” she wrote. “CANNEX is comparing apples-to-oranges here. Indexed annuities shouldn’t be compared to MYGAs; they are comparable to fixed annuities with a one-year rate guarantee.”
In reporting the results of their study, CANNEX maintains the anonymity of each carrier. If companies that subscribe to CANNEX data could identify the carriers—they can’t at this point, according to Toland—they might use such benchmarking data to support their claims of having a decision-making process that demonstrates their pursuit of the clients’ best interests.
The study doesn’t encompass FIA contracts that include some of the more recent innovations, such as custom or hybrid indices, index-linked structured annuities that permit losses up to a floor or beyond a buffer, or lifetime income benefits.
More comparative FIA should help confirm or deny the legitimacy of FIAs and, depending on the results, make advisors either more or less confident about recommending them.
© 2018 RIJ Publishing LLC. All rights reserved.
Fund Flow Report
Fund flows bounce back in March: Morningstar
In March, investors pulled $10.5 billion out of U.S. equity passive funds, compared with $8.4 billion in the previous month. On the active front, investors pulled $11.0 billion, compared with $17.7 billion in February, according to Morningstar, Inc.
Highlights from the report include:
- Taxable-bond and international-equity funds were the leading category groups, with net flows of $15.9 billion and $13.3 billion, respectively.
- March’s inflows across all category groups were nearly $13.4 billion, compared with $7.7 in outflows in February.
- The Morningstar Categories with the highest inflows in March were foreign large-blend, ultra-short bond, and intermediate bond funds with inflows of $13.5 billion, $6.0 billion and $4.8 billion, respectively. On the bottom-flowing list in March, large blend continued to see the most outflows of $19.0 billion while high-yield bond experienced outflows for the sixth consecutive month.
- Among top U.S. fund families, Vanguard was the leader in net flows with $14.8 billion in March and approximately $59.0 billion for the quarter, down from the $116.5 billion collected in 2017’s first quarter, and which represents the fourth consecutive quarter of declining inflows.
- Among all U.S. open-end mutual funds and ETFs, Vanguard Total International Stock Index, which has a Morningstar Analyst Rating of Gold, had the highest inflows of $5.3 billion. Silver-rated iShares Core MSCI EAFE ETF and Gold-rated Vanguard Total Stock Market Index followed with inflows of $4.7 billion and $4.6 billion, respectively. On the bottom-flowing list in March, Gold-rated SPDR S&P 500 ETF had the highest outflows of $15.0 billion.
Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.
© 2018 RIJ Publishing LLC. All rights reserves.
