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Great-West to distribute its new indexed VA to RIAs on the RetireOne platform

Posted on April 19, 2018 by Editorial Staff -

Great-West Financial will distribute its new fee-based index-linked variable annuity, Capital Choice, to registered investment advisors (RIAs) through RetireOne, the independent platform that offers fee-based insurance solutions to RIAs, the two firms announced this week.

“RIAs will now have access to a category of principal protection instruments that haven’t traditionally been available to them,” said RetireOne CEO David Stone, in a release. Founded in 2011, Aria Retirement Solutions’ RetireOne said it has serves over 900 advisors and has nearly $1 billion in retirement savings and income investments under administration.

“ILVAs” and related products–as a group they have no official name–offer performance that’s linked to an index, as do fixed indexed annuities (FIAs). But they characteristically offer investors much higher performance caps than FIAs. In return, investors accept the possibility of market loss (which FIAs guarantee against.)

AXA introduced the product class in 2014 and MetLife, Allianz Life, CUNA Mutual and Great-West followed. Sales grew slowly–people weren’t sure what to make of them–but the category is now a $9 billion to $10 billion business, and one of the brightest sources of sales in an otherwise slow annuity market.

The products are insurance-based versions of structured notes. Some of the them put a floor under client losses, saying that the client can lose no more than 5% or 10% over a given term. Other products, referred to as buffer products, protect contract owners from the first 10% or 20% of losses, but the client absorbs all net loss beyond that point. Some offer a return-of-premium death benefit. As a rule, they don’t offer lifetime income riders.

Great-West Capital Choice

This product is a single-premium indexed variable annuity with a one-year point-to-point crediting method and exposure to four different equity indices: S&P 500, Russell 2000, NASDAQ-100 and MSCI-EAFE. The protection strategy costs 0.4% per year.

“We’ve taken the best elements of the three or four competing products and said, ‘Here’s what we think has resonated with advisors and clients,’” said Lance Carlson, national sales director for individual annuities at Great-West. “We put it all together and now have a product with three or four distinct characteristics that we think will make it sellable.

“For instance, there are other products that charge no explicit fee for the benefit. We charge 40 basis points for the fee-based version, and 120 basis points for the commission-based version. Because of the fee we have a larger risk budget, which means we be more competitive in the cap rate environment. We say, ‘This is what you’ll get and this is what it will cost you.”

As noted above, Capital Choice has both floors and buffers. A client can choose a floor of zero (comparable to a fixed indexed annuity), -2.5%, -5%, -7.5% or -10%. This means the client absorbs any losses up to those percentages but nothing worse. Alternately, a client can choose a 10% downside buffer. If the S&P500 goes down 9%, the client loses nothing for the year. If the index drops 17%, the client loses 7% of his investment.

“We have both a buffer and a floor, and the floor has a lot of intermediate levels,” Carlson told RIJ. “When we were talking to home offices, they said they wanted a minus-five percent floor option. The broker-dealers told us that if they wanted to a minus-five floor, they had to combine a zero floor with a minus-10 percent floor.

“Let’s say the cap rate for a zero-loss floor is 3.85%, while the cap rate for minus-10% floor is 8%. So, on average, they can get an effective cap of about 6%. Our cap for the minus-five floor version is 7.15%. Our return of premium death benefit is also part of the chassis, and we’re writing it up to age 90. So if you’re 82 and you have money to pass on, and you can’t qualify for life insurance, this product can protect that money and give you a chance for growth.

“Also, there are a lot of financial advisors with a huge legacy book of VAs whose owners bought them for income but don’t need the income. Instead of paying 3.5% or 4% fees for that product, they can exchange it for our product, which costs only 0.4% in the fee-based version. That will be a differentiator for us.”

For Great-West’s Carlson, the Capital Choice product is part of a long-term strategy to expand that company’s individual product offerings in the broker-dealer channel and in the US generally. “Most of our $3 billion in profits comes from Canada or the UK. Only 10% of our profits are currently in the US,” said Carlson, who came to Great-West from a similar third-party distribution job at MetLife.

“We have not been in the retirement space for individuals, except through our relationships with Schwab and TD Ameritrade. It was a nice little business, but we did not have a big broker-dealer distribution. That’s what we have been building over the last two years.

“Instead of 10 broker-dealer relationships we now have 100. We now have 28 wholesalers focused on third party distribution, but to be a top five player we’ll need 60 or 70. A couple years ago, we did zero third-party variable annuity distribution; this year we’ll do a billion through Schwab and TD Ameritrade. We’d like to get $4 or $5 billion in annuity sales.”

Little Love for SEC ‘Best Interest’ Proposal

Posted on April 19, 2018 by Kerry Pechter -

By a 4-1 vote this afternoon, the Securities & Exchange Commissioners approved their department’s proposal for what it called “Regulation Best Interest.” The public will get 90 days to comment on it, after it is published in the Federal Register.

In her dissent, Obama-appointee attorney Kara Stein blasted it as “maintaining the status quo” and “protecting broker/dealers, not the customers.” In favor were Trump-appointees chairman Jay Clayton, Hester Peirce, and Robert J. Jackson, Jr., (all attorneys) and Republican economist Michael Piwowar (an Obama appointee).

None seemed enthusiastic about the thick 1,000-page proposal, which calls on SEC-regulated intermediaries to act in the clients’ best interest; disclose duties, fees and conflicts in a four-page Client Relationship Statement; and not use the title “adviser” or “advisor” if they aren’t one.

For statements by the commissioners, click here.

The proposal is “principles-based.” Like ineffective proposals of the past, it requires “reasonable,” not stringent, efforts to protect consumers. Not much was said about accountability. And it relies on disclosures, which were categorically ridiculed during the recent Mark Zuckerberg Facebook hearings in the Senate and which virtually everyone in the financial industry knows go unread by most investors.

Regarding the four-page model disclosure, Stein said, “We are asking a retail investor to flip through four pages of boilerplate text, read through a series of questions, and then take the initiative to engage in a conversation with his or her financial professional about matters with which he or she may not be familiar. Why are we, in effect, placing the onus on a retail investor to cure his or her own confusion?”

Although Piwowar voted for the proposal, he criticized its vagueness. “This proposal imposes on broker-dealers a new “best interest” standard. This sounds simple enough — it’s not merely a “good” interest or a “better” interest standard, it is a “best” interest standard — and that term has attracted many advocates within the industry,” he said.

But “the devil is truly in the details,” he added. “This ‘best interest’ standard is wholly different from the well-established Investment Adviser’s Act fiduciary standard and FINRA’s suitability standard. Unfortunately, after 45 days of reviewing and commenting on this release, I am not convinced that we have clearly and adequately explained the exact differences. This lack of clarity is worrisome.”

[Piwowar also made an unflattering comparison between the inaccessibility of the prose of one of the greatest works of American literature, saying that the SEC staff’s suggested language for the CRS may be “about as comprehensible to the average reader as Herman Melville’s Moby Dick.” Why throw Ahab’s symbolic sperm whale under the bus?]

Since this is the SEC, annuities and their hidden fees and commissions weren’t mentioned; IRAs weren’t distinguished from taxable accounts; and no one noted how some intermediaries switch hats, working as brokers, advisors, or insurance agents as their licensing allows and as opportunities arise. Having kicked this can for two decades, the SEC has finally done something. But it didn’t seem to do much or, more importantly, enough.

People with pensions conserve their savings: EBRI

Posted on April 19, 2018 by Editorial Staff -

The Employee Benefit Research Institute (EBRI) has been studying changes in the non-housing assets of certain retirees during their first 20 years of retirement (or until death, if earlier). This month it issued a bulletin on the topic, “Asset Decumulation or Asset Preservation? What Guides Retirement Spending?”

The bulletin relied on the Health and Retirement Study (HRS), and on the Consumption and Activities Mail Survey (CAMS), a supplement to HRS. All numbers are measured in 2015 dollars. But the report focused on existing retirees, a high percentage of whom still have pensions; it may have limited applicability to future retirees. Also, IRA savings were included in the study, but not current 401(k) assets.

“To me, the implications for national policy are not immediately clear,” the bulletin’s author, Sudipto Banerjee, told RIJ in an email. “We need more research to understand why people are behaving in this way. There could be several reasons. Like, the inability to safely convert their assets into income, the need to self-insure against various uncertainties, behavioral challenges (like becoming a spender from a saver) and personal legacy goals. Once we understand the relative importance of these factors we might be better able to address the national policy implications.”

The studied showed that:

Retirees generally exhibit very slow decumulation of assets.
Within the first 18 years of retirement, individuals with less than $200,000 in non-housing assets immediately before retirement had spent down (at the median) about one-quarter of their assets; those with between $200,000 and $500,000 immediately before retirement had spent down 27.2%. Retirees with at least $500,000 immediately before retirement had spent down only 11.8% within the first 20 years of retirement at the median.
About one-third of all sampled retirees had increased their assets over that period.
Pensioners were much less likely to have spent down their assets. During the first 18 years of retirement, the median non-housing assets of pensioners (who started retirement with much higher levels of assets) had gone down only 4%, compared to 34% for non-pensioners.
The median ratio of household spending to household income for retirees of all ages hovered around one, inching slowly upward with age. This suggests that majority of retirees had limited their spending to their regular flow of income and had avoided drawing down assets, which explains why pensioners, who had higher levels of regular income, were able to avoid asset drawdowns better than others.

In discussing his results, Banerjee, now at T. Rowe Price, wrote:

“Why are retirees not spending down their assets? There are probably a number of reasons. First, there are the uncertainties. People don’t know how long they are going to live or how long they have to fund their retirement from these assets. Then there are uncertain medical expenses that could be catastrophic if someone has to stay in a long- term care facility for a prolonged period.

“Of course, if people have to self-insure against these uncertainties, they need to hold onto their assets. Second, some of these assets are likely to be passed on to their heirs as bequests. But, what percentage of actual bequests are planned vs. accidental is an open question. Third, another possible reason for this slow asset decumulation rate could be lack of financial sophistication, or in other words, people don’t know what is a safe rate for spending down their assets.

“So, they are erring on the side of caution. Finally, some of it could be just a behavioral impediment. After building a saving habit throughout their working lives, people find it challenging to shift into spending mode. They continue to build up their assets or hold on to their assets as long as possible.

“Do these results mean no one is running out of money in retirement? No. Some retirees are running out of money in retirement (as shown in section 3 below). At the same time, instead of spending down, a large number of retirees are continuing to accumulate assets throughout retirement.

Total revenue for public life insurers rises in 2017

Posted on April 19, 2018 by Editorial Staff -

U.S. publicly traded life/annuity insurers saw total revenue rise by 5.9% in 2017, to $311.9 billion, due to increased net investment income, fees and commissions and premium revenue, according to A.M. Best, the ratings agency.

The Best’s Special Report, “Quick Look: U.S. L/A GAAP Earnings Review—Year-End 2017,” notes that the industry garnered a year-over-year $9.5 billion tax benefit in 2017 due to the impact of tax reform. Nearly three-quarters of that went to Prudential, MetLife and Aflac.

The revenue growth resulted in a 6.5% increase in operating income, even though about one-third of the companies reported a decline from 2016. However, net income grew substantially in 2017, up nearly 60% to $29.5 billion.

Fees and commissions revenue grew by 7.3%. Growth in assets under management (AUM) and mean account values was driven by an increase in the daily average equity markets. Higher fees on variable annuities, driven by higher average separate account balances, also contributed to the increase in fee income.

Although annuity revenue rose on the growth of AUM, annuity sales were marginal, influenced by an overall industry decline and shift away from variable annuity products, as well as the focus of carriers and independent marketing organizations on the evolving Department of Labor (DOL) fiduciary rule and implementation.

The majority of companies reported marginal growth in investment income due to higher AUM and a larger asset base.

Debt for Feds, Assets for Public

Posted on April 19, 2018 by No Author -

Donald Trump’s $15,000-a-year Social Security Bonus

Posted on April 12, 2018 by Eugene Steuerle -

Would you believe that President Donald Trump is eligible for an extra Social Security benefit of around $15,000 a year because of his 11-year-old son, Barron Trump? Well, you should believe it, because it’s true.
How can this be? Because under Social Security’s rules, anyone like Trump who is old enough to get retirement benefits and still has a child under 18 can get this supplement—without having paid an extra dime in Social Security taxes for it.
The White House declined to tell us whether Trump is taking Social Security benefits, which by our estimate would range from about $47,100 a year (including the Barron bucks) if he began taking them at age 66, to $58,300 if he began at 70, the age at which benefits reach their maximum.
Of course, if Trump, 71, had released his income tax returns the way his predecessors since Richard Nixon did, we would know if he’s taking Social Security and how much he’s getting. There’s no reason, however, to think that he isn’t taking the benefits to which he’s entitled.
Meanwhile, Trump’s new budget proposes to reduce items like food stamps and housing vouchers for low-income people. It doesn’t ask either the rich or the middle class to make sacrifices on the tax or spending side. And it doesn’t touch the extra Social Security benefit for which Trump and about 680,000 other people are eligible.
The average Social Security retiree receives about $16,900 in annual benefits. Does it strike you as bizarre that someone in Trump’s position gets a bonus benefit nearly equal to that?
Does it seem unfair that by contrast to Trump, most male workers—and for biological reasons, an even greater portion of female workers—can’t get child benefits because their kids are at least 18 and out of high school when the workers begin drawing Social Security retirement benefits in their 60s and 70s?
Trump is eligible for the Late-in-Life-Baby Bonus, as we’ve named it, because the people who designed Social Security decided in 1939, about five years into the program, that dependents and spouses needed extra support. They didn’t think much (if at all) about future expansion in the number of retirees, primarily male, who would have young kids.
The Late-in-Life-Baby Bonus goes to about 1.1% of Social Security retirees and costs about $5.5 billion a year. That’s a mere speck in Social Security’s $960 billion annual outlay.
Yet the Late-in-Life-Baby Bonus is a dramatic—and symbolic—example of hidden problems that plague Social Security, problems that few non-wonks recognize and that reform proposals have largely ignored.
Those problems are why the two of us—Allan Sloan, a journalist who has written about Social Security for years; and C. Eugene Steuerle, an economist who has written extensively about Social Security, co-founded the non-partisan Urban-Brookings Tax Policy Center and is the author of Dead Men Ruling: How to Restore Fiscal Freedom and Rescue Our Future—combined forces to write this article.
We want to show you how we can help Social Security start heading in the right direction before its trust fund is tapped out, at which point a crisis atmosphere will prevail and rational conversation will disappear.

Calling for Social Security fixes isn’t new, of course, but the calls usually focus primarily on fixing the increasing gap between the taxes Social Security collects and the benefits it pays.
For us, however, the Late-in-Life-Baby Bonus is an example of why reform should not only restore fiscal balance but should also make the system more equitable and efficient, more geared to modern needs and conditions, and more attuned to how providing ever-more years of benefits to future retirees puts at risk government programs that help them and their children during their working years.
If all that mattered were numbers, we could easily provide better protections against poverty with no loss in benefits for today’s retirees, while providing higher average benefits for future retirees. But that works only if the political will is there to update Social Security’s operations and benefit structure. After all, a system designed in the 1930s isn’t necessarily what we’ll need in the 2030s.
And make no mistake about how important Social Security is. Millions of retirees depend heavily on it. According to a recent Census working paper, about half of Social Security retirees receive at least half their income from Social Security — and about 18% get at least 90% of their income from it. Add in Medicare benefits, and retirees’ reliance on programs funded by the Social Security tax are even higher.
Given the virtual elimination of pension benefits for new private-sector employees and the increasing erosion in pensions for new public-sector employees, Social Security will likely be needed even more in the future than it is today.
Simply throwing more money at Social Security isn’t the way to solve its imbalances, much less deal with the Late-in-Life-Baby Bonus and some of the other bizarre things we’ll show you.
Money-tossing would just continue the pattern of recent decades that provides an ever increasing proportion of national income and government revenue to us when we’re old (largely through Social Security and Medicare), and an ever smaller proportion when we’re younger (anything from educational assistance to transportation spending). This shortchanges the workers of today and tomorrow who will be called upon to fork over taxes to cover the costs of Social Security and other government programs for their elders.
We began with the Late-in-Life-Baby Bonus because giving people like Trump—a wealthy man with a young child from a third marriage—an extra benefit unavailable to 99% of retirees is a dramatic example of how problems embedded in Social Security cause inequities and problems that few people other than Social Security experts know about.
Think that we’re overreacting to a minor quirk? We aren’t. Here are some additional aspects of Social Security that we think violate standards of equal justice and common sense:
There’s the Single Parent Shortchange, whereby many single parents—largely mothers with below-average earnings—pay Social Security taxes to cover spousal and survivor benefits for other people even though the solo parents can’t receive them. Sure, many people contribute toward benefits they will never see, especially if they die before retirement age. But the Single Shortchange strikes us as horribly unfair. Single parents are among the lowest income payers of Social Security taxes. Why should they subsidize other folks’ never-working spouses in a way that gives the biggest benefits to the best-off people?
Then there’s the Agatha Christie Benefit: Some divorced people get a bonus from Social Security only if their former spouse dies. And the Serial Spouse Bonus: If someone has had, say, three spouses, each might get the same full spousal and survivor benefits available to the one lifetime spouse of another worker — provided that each marriage lasted at least 10 years. If a marriage lasts nine years and 364 days, the spouse gets zippo.
The Equal Earner Penalty means that a couple with two people each earning $40,000 gets about $100,000 less in lifetime benefits than a couple with one spouse earning $80,000 and the other earning nothing. This happens even though both couples and their employers pay identical Social Security taxes.
Many if not most of these inequities would be illegal in private retirement plans.
Fixing the Late-in-Life-Baby Bonus and the other inequities we mentioned (as well as plenty that we omitted) is more about remedying injustice than cutting costs; giving some people more benefits and others less would pretty much offset each other.
The system needs to be overhauled not simply to become more fair by giving less to the Trumps of the world and more to the less fortunate among us, but because Social Security, created in the 1930s, was largely constructed around a world in which married women were expected to stay at home. People also had shorter lifespans then and retired later, so that today retirees receive benefits for 12 more years on average than retirees in the system’s earlier days.
Back in 1965, there were about four workers for every person drawing benefits. Currently the ratio is in the low threes. Now, the decline in birth rates is hitting with a bang as baby boomers retire en masse, with the ratio expected to fall to about 2.2 in 2035. Each baby boomer retirement leads to an increase in takers and a decrease in makers.
Not dealing with this decline in workers-to-beneficiaries—a good chunk of which is caused by Social Security treating people as young as 62 as “old” —has broad implications for the revenues available for all government services, not just Social Security, as well as for the growth rate of our economy.
Even as fewer workers support more retirees, the average value of Social Security retirement benefits continues to rise. Look at the increasing “present value” of Social Security benefits for a two-income 65-year-old couple earning the average wage each year and expecting to live for an average lifespan.
In 1960, such a couple needed to have on hand $269,000 (in 2015 dollars) in an interest-bearing account to cover the cost of their lifetime benefits. Today, it’s about $625,000. In 2030, it will be about $731,000. And in 2055, when a Millennial age 30 this year turns 67, the full retirement age under current law, the present value of scheduled benefits hits seven digits: $1,029,000. Include Medicare, and benefits are about $1 million for today’s couple, rising to $2 million for the millennial couple.
These benefit-value increases are caused by a combination of longer lives for retirees and Social Security formulas that increase benefits as wages rise.
These numbers matter because Social Security isn’t like an Individual Retirement Account or a pension plan that sets money aside for you today for use when you retire. It’s mainly an intergenerational transfer system: Today’s workers pay Social Security taxes to cover their parents, who previously paid to cover their parents, who paid to cover their parents. That’s the way the system has worked since its founding in 1935. Social Security taxes paid by current workers and their employers get sent to beneficiaries, not stashed somewhere awaiting current workers reaching retirement age.
The system does have a trust fund that in the early 1980s was about to run out of money. A crisis loomed. As a result, after a report by the Greenspan Commission, Congress in 1983 enacted reforms that included gradually raising the normal retirement age (but not the early retirement age) and subjecting some Social Security retirement benefits to federal income tax.
This led to temporary surpluses while baby boomers were in their peak earning years. But now that boomers are retiring rapidly, Social Security’s tax revenues are falling farther and farther behind benefits being paid out.
The trust fund is projected to run dry in about 15 years. Meanwhile, every year without reform adds to the share of the burden required of the young, who already are scheduled to have lower returns on their Social Security contributions than older workers.
Do you think that if someone offered millennials a choice, they would want to face huge student debt, declining government investment in their children and higher future taxes (which are inevitable as deficits mount) — in exchange for a more generous retirement than today’s retirees get? Or would they prefer a system that treats them and their children better when they’re younger?
We’re both way past millennial age — but we know which we would prefer.
Now, we’ll show you how we can tweak Social Security to address the problems we’ve discussed without cutting benefits for current retirees or denying future retirees average benefits higher than current retirees get.
It’s about math. Social Security pays out far more than would be required to provide well-above-poverty-level benefits to all elderly recipients. Future growth in the economy will help tax revenues and benefits rise, which would give us room to modify the payout formulas and deal with problems that this iconic program isn’t addressing.

Those problems include poverty and near-poverty for millions of retirees, particularly the very old. That problem is greater for people who retired at 62 rather than waiting for their full retirement age, a move that locks them into lower payments for the rest of their lifetimes.
How can we orient the system more progressively to the needs of modern society, provide a stronger base of protection for all workers, and slow the growth rate of benefits to bring the system into better balance? To shore up Social Security permanently, it’ll be necessary to slow down the overall growth in benefits, encourage more years of work and end the pattern of people having ever-longer retirements as lifespans increase and Social Security doesn’t adapt its rules. At some point, it will also require a revenue (i.e., tax) increase, too.
Here, in simplified form, are some suggestions for making Social Security more modern and more fair:

Change the benefit structure. Reduce the level of benefits that retirees get in their 60s and early 70s but give them higher-than-now benefits in their mid-to-late 70s and beyond. That would shift resources to retirees’ elder years when they have greater needs, including a higher probability of having to pay for long-term care.

Raise the minimum benefit. Have a strong minimum benefit for most elderly that’s indexed to wage growth, which typically exceeds inflation. This would raise benefits for one-third to one-half of the elderly in a way that will essentially remove them from poverty

Index the retirement age. Having people work for additional years helps pay for higher levels of both lifetime and annual benefits. So if people on average are living a year longer, they should have to work a year longer. Those additional income and Social Security taxes would help support both Social Security and national needs that are higher priority than paying additional retirement years. Gradually phase out the early-retirement age that leads many healthy couples to retire on Social Security for close to three decades for the spouse who lives longer.

Trim benefit growth for those at the top. Offset at least part of the cost of higher minimum benefits by paying the highest-paid recipients less in the future than they would get under the current formula. Slow the rise in benefits for future retirees with way-above-average lifetime earnings by indexing their benefits to inflation rather than to wage growth.

Make spousal and survivor benefits more fair. Modify these benefits so that they provide higher benefits for those with greater needs rather than giving the richest bonuses to the richest spouses even when they contributed less in taxes than lower-income spouses. Otherwise, use rules similar to what private pensions use, so that benefits are shared fairly for the time of marriage together.

And one final thing: Bye-bye late-in-life-baby bonus. Stop paying retirees extra for children under 18. Continue the young-child bonus for widows or widowers below retirement age, and for people on disability.
Eliminating that bonanza for older parents would be a symbolic first step. And who can say? Perhaps now that lots more people (including possibly Trump himself) know that the Late-in-Life-Baby Bonus exists, our leaders might just be embarrassed enough to realize that the sooner Social Security is adapted to modern needs and circumstances, the better.
If this results in starting to fix Social Security the right way, the Late-in-Life-Baby Bonus will have delivered a big-time bonus of its own. The beneficiaries would be our future retirees, our workers and our country as a whole.

A ‘SideCar’ Account for UK Plan Participants

Posted on April 12, 2018 by Editorial Staff -

NEST, the workplace-based defined contribution (DC) plan sponsored by the British government, has announced the trial of a new savings model that would split retirement savings accounts into ‘pension contributions’ and an ‘emergency fund’ that participants could use to provide a quick source of cash at any time.

In short, NEST, which was created to serve the millions of middle-class and minority Britons whose employers didn’t offer a DC plan, wants to do what “financial wellness” advocates in the US recommend: Let people access some of their retirement money without claiming a “hardship” or taking out a loan.

A relevant deadline is looming. Minimum contributions to NEST will rise to 5% this month and to 8% in April 2019, effectively locking more consumer earnings into a pension fund. If participants think these increases are unaffordable or don’t want to tie up their money in this way, they might drop out of NEST (National Employment Savings Trust).

That’s according to GlobalData, a UK data and analytics firm. “NEST is thinking about the customer by providing the best of both worlds,” said GlobalData analyst Danielle Cripps, in a release. “Giving customers access to a small amount of their pension pot may well prevent some individuals opting-out.”

“Sidecar” is the name for the proposed new savings model. Pension contributions will be split between a standard NEST pension pot, and a separate bank account or liquid fund with a set threshold. When the threshold is reached, all contributions will be allocated towards pension savings.

The saver can withdraw money from the emergency fund at any time. However if they do so, contributions will then again be split between the pension pot and the emergency fund until the threshold has once more been reached. Still unknown: How NEST will control emergency fund withdrawals, so that access does not cause too much damage to the main goal of pension saving.

“NEST should help to educate customers so they understand how much they will need to contribute over time in order to reach a suitable level of savings for retirement, and how any emergency fund withdrawals will impact this,’’ Cripps said.

Two new reports analyze advisor needs and job switching

Posted on April 12, 2018 by Editorial Staff -

As broker-dealer advisors do more planning, they increasingly look to their home offices for technical support and resources, according to Cerulli Associates. Client demand, regulation, and competition from digital, low-cost providers are driving the trend.

“Sixty percent of advisors agree that client demand for financial planning is increasing and that their financial planning process differentiates their practice from other advisors,” said Marina Shtyrkov, a research analyst at Cerulli, in a release. “Those that have the scale to invest in building and maintaining this support” will have a competitive edge.

“Many [smaller] RIAs lack centralized planning support and, instead, partner with third-party firms for additional resources,” she added.

B/Ds with scale “can hire advanced planning teams of financial planning specialists that… employ CPAs who specialize in tax efficiencies, attorneys with estate planning backgrounds, and CFP professionals who can help clients with complex planning issues, such as concentrated stock options and business planning,” the release said.

For more on this topic, see the second quarter 2018 issue of The Cerulli Edge – U.S. Advisor Edition, which discusses the evolving fees for financial planning and other services in response to providers’ profit pressures and clients’ concerns about the value received.

Fidelity’s survey of ‘Movers’

More than half (56%) of advisors considered switching firms in the past five years, and nearly one in four (23%) (the “Movers”) actually made a move during that time, according to the latest Advisor Movement Study from Fidelity Clearing & Custody Services, a unit of Fidelity Investments.

The study also found that Movers are now transferring more assets when they move to a new firm: $75 million in median assets in 2017 versus $37.5 million in Fidelity’s 2012 research.

Movement to independent channels is increasing, a Fidelity release said. RIAs and independent broker-dealers are the top destinations, with 64% of Movers choosing one of these channels—up from 50% of Movers in Fidelity’s 2015 Advisor Movement research.

Overall, Movers’ peers—advisors on their team, former colleagues who moved or advisors who work for the firm—influence their decisions to switch; 63% of Movers identified those groups as influential to their decision in 2017, versus 50% in 2012.

Almost half of Movers (47%) moved along with a team in 2017, versus 34% in 2012. Advisors moving to an independent broker-dealer more often depart as a team versus other Movers.

Regulatory uncertainty due to the Department of Labor’s Investment Advice Rule was on advisors’ minds when surveyed, according to Fidelity. Nearly a quarter (24%) of Movers mentioned it when describing the market landscape when they considered switching, as did 47% of advisors who had seriously considered or are still considering a move.

Fidelity also surveyed advisors on the recent decision of some firms to leave the Broker Protocol. After the news, the majority of advisors who recently switched or are considering switching said it would have only a moderate or no impact on their decision. Just 30% of advisors felt that the news would stop advisors from switching firms.

Fidelity will further explore advisor movement at the company’s 11th Annual Recruiters Summit being held this week in Boston.

Fidelity has $6.9 trillion under administration, including managed assets of $2.5 trillion as of February 28, 2018. The privately-owned company serves more than 27 million individuals, 23,000 sponsors of employee benefit programs, and 12,500 financial advisory firms.

Nobody Wins a Trade War

Posted on April 12, 2018 by Stephen Slifer -

Sometimes when watching the stock market’s shenanigans, it is easy to lose track of the big picture. We get it. When the market moves up or down 500 points on successive days, it is easy to conclude that the stock market is emitting a warning signal that all is not right in the economy. Stock market volatility is unsettling. But sit back, take a deep breath, and try to figure out why the stock market has been reacting so violently. Determine in your own mind whether that is likely to have any long-lasting impact on the economy. If you are a consumer, are you any less willing to buy that new car or house? Do you have any desire to postpone that long-planned summer vacation? If you are a businessperson have you seen any drop-off in your order book? Are you considering layoffs or cutting back on the hours your employees work? Our guess is that in the current environment none of you are contemplating any of the above. As we see it the economy is expanding nicely.

To read the rest of this post at its source, and to see the graphics that accompany it, click here.

Voya creates a Chinese brand name for use in US

Posted on April 12, 2018 by Editorial Staff -

Voya Financial, as part of an effort to cater to the Chinese community in the U.S. has created a Chinese-language version of its brand name and a “bilingual brand signature” with the help of the New York office Labbrand, a global brand strategy firm.

The Voya Financial brand itself is less than four years, having been the U.S. unit of ING until 2014. Since then, Voya has tried to position itself as “America’s retirement company,” although it is not the only financial services company vying to establish that kind of identity.

Voya’s Chinese brand name is [wò yǎ]. It is intended to be “optimistic, approachable, and relatable.” Labbrand created it after conducting “linguistic tests in major Chinese dialects” spoken in the U.S., Mandarin, Cantonese and Minnanhua. The two characters chosen for the name are readable in both traditional and simplified Chinese characters.

“The Chinese brand name [wò yǎ] envisions a rich and happy journey towards and through retirement, while maintaining similar pronunciation in Chinese to the original name “Voya,” said Voya’s press release. “[wò] stands for richness, implying an aspirational life full of joy. [yǎ] means elegance and peace, reflecting peace of mind and assurance for the future and life during retirement.”

The name has an optimistic and trustworthy tone, resonating with Voya’s brand image and customers’ expectations. This name was linguistically tested among speakers of Mandarin and two major Chinese dialects spoken in the U.S. – Cantonese and Minnanhua.

Voya plans to use the Chinese brand name and visual identity for marketing efforts through its website, social media, TV ad, print media, video, and other collateral.
Labbrand has regional operations in Shanghai, Singapore, Paris, New York and Vancouver, B.C.

New research on interest rates, bitcoin, etc.

Posted on April 12, 2018 by Editorial Staff -

Here are abstracts of new papers from a variety of sources, including the National Bureau of Economic Research (NBER) , that might interest RIJ readers. To purchase copies of any of the NBER papers ($5 each), click on the bold-faced titles.

Monetary Tightening, Financial Markets, and the U.S. Economy, by Tanweer Akram, Thrivent Financial.

The Federal Reserve has been gradually tightening monetary policy since late 2015. The tightening of monetary policy is motivated by sustained improvements in the labor market and concerns about risks to financial stability due to low interest rates. However, the pace of core inflation is subdued and still below the Fed’s target.

A gradual pace of monetary tightening does not have an adverse effect on financial markets and the U.S. economy, our examination of past episodes of monetary tightening shows. Stock prices tend to rise despite higher interest rates. The short‐term interest rate moves in tandem with the fed funds target rate.

The long‐term interest rate usually rises with higher short‐term interest rates though so less in magnitude. The shape of the Treasury yield curve tends to flatten as monetary policy becomes tighter. Growth in industrial production generally continues amid higher interest rates if effective demand is sustained. Housing activity is sensitive to the mortgage rate but is supported by the improvement in the labor market and economic activity.

These empirical regularities associated with a gradual pace of monetary tightening imply that the U.S. economy should continue to expand at a moderate pace this year and possibly beyond. However, there are downside risks to the economic outlook. An inversion of the U.S. Treasury yield curve could be a useful signal of the risk of a slowdown in the business cycle.

Some Simple Bitcoin Economics, by Linda Schilling and Harald Uhlig.

How do Bitcoin prices evolve? What are the consequences for monetary policy? We answer these questions in a novel, yet simple endowment economy. There are two types of money, both useful for transactions: Bitcoins and Dollars. A central bank keeps the real value of Dollars constant, while Bitcoin production is decentralized via proof-of-work.

We obtain a “fundamental condition,” which is a version of the exchange-rate indeterminacy result in Kareken-Wallace (1981), and a “speculative” condition. Under some conditions, we show that Bitcoin prices form convergent supermartingales or submartingales and derive implications for monetary policy.

The Role of Financial Policy, by Roger Farmer.
I review the contribution and influence of Milton Friedman’s 1968 presidential address to the American Economic Association. I argue that Friedman’s influence on the practice of central banking was profound and that his argument in favor of monetary rules was responsible for thirty years of low and stable inflation in the period from 1979 through 2009.

I present a critique of Friedman’s position that market-economies are self-stabilizing, and I describe an alternative reconciliation of Keynesian economics with Walrasian general equilibrium theory from that which is widely accepted today by most neo-classical economists.

Age and High-Growth Entrepreneurship, by Pierre Azoulay, Benjamin Jones, J. Daniel Kim, Javier Miranda.
Many observers, and many investors, believe that young people are especially likely to produce the most successful new firms. We use administrative data at the U.S. Census Bureau to study the ages of founders of growth-oriented start-ups in the past decade.

Our primary finding is that successful entrepreneurs are middle-aged, not young. The mean founder age for the one in 1,000 fastest growing new ventures is 45.0. The findings are broadly similar when considering high-technology sectors, entrepreneurial hubs, and successful firm exits.

Prior experience in the specific industry predicts much greater rates of entrepreneurial success. These findings strongly reject common hypotheses that
emphasize youth as a key trait of successful entrepreneurs.

An Income Strategy for a Couple with $200K

Posted on April 12, 2018 by Kerry Pechter -

At Wegman’s supermarkets in the northeast, you often see people in their late 60s working part-time at cash registers, or tempting shoppers with trays of finger-food, or even refilling the shelves as what (in pre-Universal Product Code, pre-gender-neutral days) were called “stockboys.”

When asked, some of these older workers say they work to “stay busy,” or to “get out of the house.” Some are taking advantage of Wegman’s health care benefits. But many are probably doing it to delay spending their savings, or to bolster their savings, or to delay claiming Social Security benefits.

If so, they’re following state-of-the-art advice. Many academics and advisors agree that “constrained” retirees (those with marginal savings) can best avoid running out of money later in life by delaying retirement and benefits Social Security until age 70. It’s not easy or popular, but it’s possible.

Take a recent article by Joe Tomlinson in Advisor Perspectives, for instance. An actuary and CFP, Tomlinson writes frequently about retirement income planning. In many of his articles, he recommends the purchase of single-premium immediate annuities, or SPIAs, for financially “constrained” retirees.

In this article, he doesn’t. Instead, he recommends working longer and maximizing Social Security benefits as the best retirement income plan for a 65-year-old couple with a combined pre-retirement income of $75,000 and a retirement income need of $60,000 a year.

The hypothetical couple lives in paid-off home worth $200,000, qualifies for combined $28,000 a year in Social Security benefits at age 65, and has saved $200,000 (50% stocks, 50% bonds) in qualified (pre-tax) accounts. That’s more savings than the median babyboomer has ($147,000, per a 2016 Transamerica survey) but much less than the couple needs.

But Tomlinson finds a solution, after considering a number of tactics. The couple can work to age 67 or to age 70, which raises their Social Security benefits, enhances their savings and reduces the number of years of retirement that will require funding. They can try using a reverse mortgage or opening a reverse mortgage line-of-credit.

Since their Social Security income will make up such a big fraction of their resources, they can afford to hold 100% stocks instead of 50%. He also tests the possibility of using savings to buy a SPIA for immediate income or a QLAC (qualified longevity annuity contract) providing lifetime income at age 85.

Tomlinson eventually recommends a strategy that require the use of home equity, working longer, delaying Social Security, shifting money to stocks and—crucially—using the required minimum distribution (RMD) method of decumulating the $200,000 in qualified money (where withdrawals starts at 3.65% per year at age 70 and gradually reach as much as 8.77% per year at age 90).

This strategy raises the couple’s income to almost $57,000 a year, or very close to their goal of $60,000. Just as importantly, it entails a portfolio failure rate (risk of having only Social Security to live on) of only 10%, Tomlinson figures. Working longer is an essential element to this strategy, because it saves the couple from spending more than half of their $200,000 in savings between the ages of 65 and 70. Equally important is a reverse mortgage tenure (a lifetime payment based on the equity in the house). It’s not so crucial that the couple move all their savings into stock.

“Delaying Social Security doesn’t increase consumption for this example, but it significantly reduces downside risk. The use of a reverse mortgage provides a significant benefit by accessing a new source of funds,” Tomlinson writes. The tenure form of a reverse mortgage provides a level payout for life. This strategy would leave the couple with enough liquidity to maintain the house, as required by the reverse mortgage contract.

“The biggest improvements in retirement prospects come from working longer. For those who don’t save enough, it is a big plus to have stable employment in a good job, and to keep building job skills while maintaining good health. More human capital makes up for less financial capital.”

As mentioned above, Tomlinson tested the use of a SPIA at age 70 with $82,000 (the amount left over after retiring at age 65 and spending $118,000 before age 70). He also tested the purchase of a QLAC (with income starting at age 85) with $20,000 of the $82,000. Neither of these strategies produced the most income, according to his calculations.

There are potentially hard-to-swallow trade-offs implicit in this strategy for the millions of American couples who are likely to find themselves in similar circumstances at age 65. To the extent a couple taps home equity for consumption, it won’t be available for health care expenses or bequests.

There’s also no overestimating the difficulty that some (though not all) people may have with the prospect of working until 70. People in marginal or poor health, people with physically demanding jobs, and people without accommodating employers may face barriers beyond their control. But, as Wegman’s older workers have learned and demonstrated, opportunities exist for those who look for them.

Nominal Prices, Homes and Cars: 1968-2018

Posted on April 12, 2018 by No Author -

‘Peeps’ Try to Peck Through a Pension Shell

Posted on April 5, 2018 by Kerry Pechter -

Year after year, and most eagerly at Easter time, Americans consume millions of yellow marshmallow chicks called Peeps. The spongy hatchlings, along with movie-concession staples like Mike & Ike and Hot Tamales, are manufactured in Bethlehem, PA, by Just Born, a century-old candy company.

Just Born recently became known for more than just neon-hued snacks. The firm is in litigation with the multi-employer pension plan (MEP) to which it and scores of similar companies contribute on behalf of their workers. The outcome of the lawsuit could help determine the future of the MEP concept.

All sides agree on the facts in the case. In 2012, Just Born and its workers’ union, the Bakery & Confectionery Union, signed a collective bargaining agreement (CBA) in which Just Born agreed to contribute to the union’s MEP for every worker who helped produce candy in its factories. The CBA would run until February 28, 2015.

Later in 2012, Hostess Brands, the makers of Twinkies and the biggest member of Just Born’s MEP, declared bankruptcy and stopped contributing to the pension fund. That threw the fund into “critical” underfunded status. To address the problem, the pension trustees created a new contribution program, to which Born agreed.

In 2015, when the CBA expired, Just Born’s owners announced that it wanted to make a change. During negotiations over a new contract, it told the union that it would continue to contribute to the pension for existing workers but would enroll all new production employees in a 401(k) plan instead of in the pension.

Just Born simply hoped to do what countless single-employer defined benefit (DB) plan sponsors have done—switch from DB to defined contribution (DC) plans and shrink their benefits burden. But the candymaker belongs to a MEP. Labor law lays specific responsibilities on the member companies in a MEP when one member—Hostess, in this case—withdraws from it.

Unilaterally deciding to switch to DC for new hires isn’t allowed. So when Just Born declared “any new [CBA] relieves it from the obligation to make contributions to the Fund on behalf of newly hired employees” and stopped doing so, the pension fund and its trustees sued and Just Born workers (briefly, in 2016) walked out.

The Just Born story is about a specific MEP crisis within a national MEP crisis. Overall, there are 1,296 MEPs in the US serving about 211,000 employers, 3.8 million active participants and 3.66 million retirees and beneficiaries, according to the National Coordinating Committee for Multiemployer Plans.

Of those plans, 311 were in “critical” (and collectively $187 billion underfunded) or “critical and declining” ($76 billion underfunded) status in 2015, according to the Center for Retirement Research at Boston College.

Whitepapers and special reports about the MEP crisis appeared last year, and this February, Congress appointed a blue-ribbon committee to come up with a plan for getting MEPs out of the red. Exactly how productive talks between union-dominated MEPs and a conservative, business-oriented Congress will be remains unclear.

$60 million exit penalty

Just Born wants to do the unprecedented. As Judge James Wynn of the Fourth Circuit Court of Appeals told Just Born’s lawyer during a January 24 hearing: “You found a neat way to get away from the withdrawal penalty. Basically you got rid of it in a circular way that nobody has ever done. You would be the first to do such a thing as this.”

The question is whether an employer in a MEP can segment its workforce and not enroll new workers in the plan without withdrawing from the plan. Just Born doesn’t want to exit the underfunded plan; that would force it to pay a withdrawal penalty based on its share of plan’s unfunded liability. Just Born’s share, as reported by the Washington Post, would be about $60 million.

If Just Born successfully defends its move, other companies could follow suit and MEP plans, already in crisis generally (see below), would be in deeper trouble. So far, Just Born has not been successful. In early 2017, a Maryland federal district judge ruled in favor of the Bakery & Confectionery Union.

“Defendant seems to be trying to walk the line between… two sections of ERISA [Employee Retirement Income Security Act of 1974], avoiding the contributions required under Plaintiffs’ rehabilitation plan schedules while simultaneously avoiding… withdrawal liability by removing itself from the Fund by attrition, making each new hire an effective withdrawal without acknowledging withdrawal in a way that would trigger the withdrawal penalty,” wrote District Court Judge Deborah Chasanow.

“Allowing an employer to avoid both payments would run contrary to the aim of the two statutes ‘to protect beneficiaries of multiemployer pension plans by keeping such plans adequately funded,’” she added. Just Born, represented by David Rivkin of the Washington, D.C., law firm of Baker Hostetler, then appealed the decision to the U.S. Court of Appeals, Fourth Circuit.

Last January 24, a three-judge panel consisting of Judges James A. Wynn, a 2010 Obama appointee, G. Steven Agee and Stephanie D. Thacker heard oral arguments from Rivkin and from Julia Penny Clark, an experienced labor law litigator with the firm of Bredhoff & Kaiser in Washington.

Rivkin (left), who served as the lead outside counsel in the multi-state suit to nullify the Affordable Care Act, aka “Obamacare, argued that, regardless of the law, it makes no sense to handcuff employers to sinking pension plans. “If you make it too onerous for an employer [to modify a plan], nobody would join ERISA plans in the first place. If you make it too onerous, they’re going to go bankrupt. This [law] is not a cash cow.”

‘Hotel California’

Invoking the Eagles’ melancholy hit song, Rivkin asserted that, if Just Born’s flexible interpretation of the law were disallowed, “You’re talking about a ‘Hotel California’ approach. Once you join, you can never leave. Employers don’t have to join these funds, and if they knew it was going to be a Hotel California situation, they would never sponsor a pension fund.”

The attorney for the baker’s union argued the law. “There’s nothing in the statute that says, ‘But wait, if you haven’t yet hired somebody suddenly they are treated differently, and you don’t have an obligation to them,” Clark (right) said. “[The law doesn’t say] That anyone who comes in and works in that job is covered by the obligation to contribute, but anybody who hasn’t yet walked in is now outside of my contribution obligation and I’m not a bargaining party with respect to them.”

Experts on MEPs told RIJ that the law is fairly clear in this case. “Under ERISA, as amended by the Pension Protection Act, certain rules apply when plan is in critical status. Included is a prohibition against restriction of eligibility,” said Richard Perry, a New York attorney at the law firm of Jackson Lewis who represents employers in such cases.

The withdrawal penalty, he added, isn’t necessarily as onerous as it may look. “The penalty doesn’t have to be paid in a lump sum and the real number may be significantly less than that,” Perry told RIJ. “There’s a calculation of the annual payment amount based on historical contributions. It’s paid in annual installments that are generally limited to 20 years.” If paid in a lump sum, might be the present value of those 20 payments.

“The usual issue is: ‘We can’t afford this and we want to get out in general.’ And if you withdraw from a MEP, you pay a withdrawal penalty,” said Josh Gotbaum, who was CEO of the Pension Benefit Guaranty Corporation from 2010 to 2014. “Just Born’s issue is not the usual issue. Their argument is, ‘We’re not withdrawing because were leaving employees in the plan.’ If they win that argument, then other unions will also think about letting new employees go into a 401(k) plan.”

If Just Born weren’t in a MEP, this wouldn’t be a big deal, Gotbaum told RIJ this week. “Just Born is just trying to do what companies with single-employer plans in the private sector do. In that world, this is not a revolutionary act.” But it’s a big deal in the Taft-Hartley world, he added, where “people are already nervous because the withdrawal penalty in Taft-Hartley cases doesn’t cover all of the withdrawal liability. The penalty understates the obligation.”

‘Messed up’ policy

All of this is happening in the context of a larger crisis in the MEP world and the pension world generally. As former Social Security trustee Charles Blahous recently wrote, “Underfunding of U.S. multiemployer pension plans has reached roughly half a trillion dollars… PBGC is only obligated to backstop a portion of these pensions’ benefit promises, [but] even those obligations are estimated to put PBGC $65 billion in the red.” Legislation that might resolve the MEP problem surfaced in mid-February when Phil Roe (R-TN) and Dan Norcross (D-NJ) introduced the GROW Act. It proposed European-style DB/DC hybrids that would provide variable, non-guaranteed pensions to union participants. Unions could maintain a pension-like benefit for their members but employers would no longer be liable for pension underfunding.

Unions are split on the GROW Act, however, with the Building Trades Unions in favor and the Teamsters opposed. Skopos Labs, a New York forecasting firm, gives the bill only a 9% chance of passing. Meanwhile, the Retirement Enhancement & Savings Act, which would have created “open” MEPs was left out of the recent omnibus appropriations bill.

This year, a 16-member congressional committee will try to come up with a new solution to the MEP mess. But, given the general discord in Washington, and the entrenchment of so many competing interests, pensions seem almost beyond repair. Those who understand the issues best are deeply frustrated. As former PBGC chair Gotbaum put it, “We have so messed up retirement policy that we can’t think about sensible ideas.”

Should My Neighbor Buy that Indexed Annuity?

Posted on April 5, 2018 by Kerry Pechter -

A neighbor recently asked me to help her understand an indexed annuity that she was thinking of buying. She had met an advisor at a retirement planning seminar at the local community college, and he had recommended it to her during a subsequent free, one-hour consultation. Bring over the paperwork, I said.

A few evenings later she appeared at my front door, carrying a neat stack of fresh collateral: Several glossy pocket-folders bulging with the usual income projection spreadsheets, product fact sheets, an explanation of the asset allocation methodology of the advisor’s asset manager, and information about a local team of investment advisor representatives (IAR).

She wanted my opinion on whether she should buy the IAR’s recommended solution to her retirement income needs: a Athene Ascent Pro Bonus indexed annuity with a guaranteed lifetime withdrawal benefit.

Now a lively 60 years old, my neighbor works as a radiology technician at a local hospital. She earns about $75,000 a year, plus bonuses. She’s single, but has a significant other of long-standing. Her daughters are grown; one lives nearby and the other out-of-state. Her five-bedroom semi-rural home is nearly paid-for but needs exterior paint and repair. She saves prodigiously and hopes to retire in six or seven years.

We spread out her literature and her notes on my dining room table. She showed me the advisor’s card, which identified him as an IAR and as a credentialed National Social Security Advisor. His asset manager was Brookstone and his broker-dealer was Signator, which is part of the John Hancock Financial Network.

At their first meeting, the advisor asked about her financial resources, needs and goals. She plans to work until she’s 67 and downsize from her sprawling home to a smaller house or condo. She guessed that she would need about $4,000 a month (plus inflation adjustments) before taxes to cover her essential expenses in retirement. If she retires at 67, she’ll receive about $22,250 a year from Social Security.

Her financial statements showed investments of almost exactly $300,000, spread over two 401(k)s, a traditional IRA, a Roth IRA, and a brokerage account. She also has a $202 monthly pension from an early-career employer. It’s not clear how much free cash she might generate by downsizing. Her widowed mother, age 93, lives many hours away in the original family home. She owns a bit of real estate of potentially significant value. My neighbor and her brother will divide her mother’s assets evenly when she dies.

The advisor gathered up the information and, at a second meeting, unveiled his recommendation. He proposed that, since she had no pension or source of guaranteed income, she should buy an indexed annuity that would pay her an income for life. He brought out brochures for the Athene Ascent Pro Bonus fixed indexed annuity (FIA).

The Ascent Pro Bonus is an income-oriented FIA. Its options include a 15% premium bonus and annual deferral bonus of 10% of premium. The income rider costs 1% per year. There’s a 10-year surrender charge period with an initial penalty between 12% and 8.3%, depending on the contract, and a 10-year vesting period for the signing bonus.

The advisor recommended that my neighbor combine the $90,000 in an old 401(k) and the $98,000 in Roth IRA ($188,000 total) and purchase the Athene contract today and delay her retirement until age 70. His figures showed that if she stopped working at age 67, her income level would drop below her income need by about age 76. If she took income from the indexed annuity at age 67, it would pay her only $16,900 a year. But if she delayed to age 70, the 15% premium bonus and annual 10% deferral bonuses would bring her benefit base to $269,000 and her annual annuity income to $20,609.

That $20,609, plus projected Social Security benefits of $28,900 at age 70, he said, would provide her with $49,509 a year before taxes in 2025. Annual withdrawals from her managed accounts would start at $6,562 and rise by about 10% per year. With her $2,424 per year pension, her pre-tax income in 2028 would be $58,512.

Her mind had fogged over about halfway through the advisor’s presentation, she admitted. Although she studied the spreadsheets and listened to his explanation, she couldn’t, despite considerable native intelligence, quite follow. She understood him to say that her money would grow by a guaranteed rate of 10% a year.

The advisor said he would earn 1.0% per year from managing her annuity assets and 1.5% per year from managing her risky assets. If he explained the rules about withdrawals and their potential impact on her future income stream, she doesn’t remember it. If she understood that the plan would work only if she delayed retirement to age 70, she didn’t mention it to me. Instead, she said she would absolutely not work past age 67 if she could help it.

For the sake of comparison, I suggested that we surf over to Immediateannuities.com to learn what deferred income annuities were currently paying. We entered her data into online calculator and clicked. For a premium of $188,000, with income delayed for seven years, an average DIA would pay $1,376 per month or $16,512 per year (for life with no death benefit), or $1,268 per month or $15,216 (for life with return of unpaid premium death benefit). For a 10-year deferral, she would get about $1,700 a month or $1,550, respectively.

So there you have it: A true-life instance of a classic situation. A mass-affluent near-retiree attends a free seminar, takes advantage of the offer of a free financial workup, and ends up with a proposal to buy an indexed annuity with her qualified money. Since their last meeting, the advisor has left my neighbor several phone messages that she has not yet returned.

This anecdote exemplifies the type of transaction that the DOL fiduciary rule would have disrupted (by requiring a “Best Interest” pledge and the liability that went with it). Should this type of transaction be disrupted? Or does this story serve as evidence that the current regulatory regime is working to the benefit of consumers? Please tell me what you think, and I’ll publish your answer.

Social Security Started from Scratch–and That’s Its Biggest Problem

Posted on April 5, 2018 by Editorial Staff -

As retirement mavens well know, Social Security is projected to be unable to pay more than about 75% of its promised benefits after 2034. Yet there’s been little productive public discussion about how–via a combination of higher taxes and/or lower benefits–the financial health of the national pension might be restored.

A new report from the Center for Retirement Research at Boston College should help establish a factual foundation on which to have that debate. It asserts that the only thing wrong with the financing of the system is its $20-odd trillion “legacy debt,” which is responsible for the OASI’s “missing trust fund.”

These are notional numbers that quantify the simple fact that the government sent out Social Security checks—starting with one for $22.54 that Vermont legal secretary Ida May Fuller received in January 1940—well before it had amassed a pension fund to pay for them.

Analysts at the CRR say Social Security would be healthy today if it had been prefunded, and if it had built up an interest-bearing trust fund. “If there had not initially been this period of time when no trust fund was yet developed, there would be enough money” today for Social Security to pay its promised benefits in full, the Center’s associate director of research, Geoffrey T. Sanzenbacher, told RIJ this week.

“The fact that we don’t have as many workers per retiree now as we used to wouldn’t be a problem,” Sanzenbacher said. “And the people who are retiring now, the people born around 1950, actually paid their fair share. They aren’t getting more than they contributed.” He’s the co-author, with CRR director Alicia H. Munnell and senior research advisor Wenliang Hou, of “How To Pay for Social Security’s Missing Trust Fund.”

This is a revolutionary idea that could clear the air and allow enough oxygen into the room for a healthy debate. Evidently, Social Security isn’t a “Ponzi scheme,” as many people glibly say. Nor should it necessarily be ammunition for “generational warfare” between the Boomers and their kids.

Sanzenbacher also questioned the idea that Americans don’t get a fair return on their payroll contributions to Social Security. “The program has a lot of insurance value,” he said. Because the benefit is protected from market volatility, is inflation-adjusted and has a survivor benefit, and that the system doesn’t create winners and losers (as a market-based retirement program would) it has a value, relative to a defined contribution savings, that often goes unappreciated.

Now that most of those early free riders on the system have passed on, who should bear the burden of “paying back” the phantom trust fund and/or the interest on it? There are “a “a variety of ways to structure a revenue increase,” the paper’s authors say, “ranging from an increase in the payroll tax without an expansion of its base, to a smaller increase in the payroll tax with an expansion of its base, to an increase in the income tax.”

“Increasing the payroll tax tends to place a disproportionate burden on middle class working households, whether that burden is measured by reduced household income or by reduced utility,” the paper says.

“Getting rid of the payroll tax cap distributes some of that burden onto the top quartile, but the effect on middle class workers is still fairly substantial. Increasing the income tax, on the other hand, places more of the burden on the top quartile.

“Taxing the society more widely – through an income tax increase – could make sense given that society as a whole benefitted from having a generation of people receive benefits who did not fully contribute to the system. Any of these taxes could be raised permanently by a moderate amount, effectively paying the missing interest from the Missing Trust Fund, or by a larger amount, ultimately replacing the Missing Trust Fund before returning taxes to their current level.”

Allies pay for our nukes by holding US bonds, economists suggest

Posted on April 5, 2018 by Editorial Staff -

If other nations believe that President Trump intends to break America’s international defense agreements, interest rates on U.S. Treasury debt could rise as a result, according to a new article by economists Barry Eichengreen, Arnaud J. Mehl, and Livia Chitu.

In their paper, “Mars or Mercury? The Geopolitics of International Currency Choice” (NBER Working Paper No. 24145), the authors claim that certain nations indirectly pay to be under the U.S. nuclear umbrella by holding a large percentage of their foreign reserves as U.S. Treasury debt.

Military alliances as well as financial considerations influence the composition of a nation’s foreign currency reserves, they write, and suggest that if the U.S. were to withdraw from global geopolitical affairs, foreign demand for dollars might decline. This could ultimately lead to higher long-term interest rates in the U.S.
America’s vast global security umbrella, in place since the end of World War II, protects the dollar’s status as the leading international currency (established by the Bretton-Woods Agreement of 1944). As a consequence, a high percentage of global trade is conducted in dollars, which makes U.S. debt more marketable overseas.

This “exorbitant privilege,” as the dollar’s status has been called, allows Americans for instance to pay for Chinese goods in dollars, for instance, instead of paying in renminbi, which we would have to earn by exporting goods or services to China. The dollar’s status allows us to run a big trade deficit without dire consequences.

If the United States is no longer seen as a predictable guarantor of the security of its allies, then countries that are currently dependent on the U.S. for military protection could reduce the share of their reserves held in dollars by as much as 30 percentage points, while increasing the shares of such other currencies as the euro, yen, and renminbi, the researchers proposed.

The researchers estimate this would raise the long-term U.S. interest rate by 80 basis points, raising interest payments by the U.S. Treasury by roughly $115 billion each year given the level of public debt in late 2016. They note that this is more than many estimates of the cost of maintaining the American military’s overseas presence.

‘Excessive fee’ case against Yale to continue

Posted on April 5, 2018 by Editorial Staff -

A U.S. District Court judge in Connecticut has denied most of Yale University’s motions to dismiss a suit, filed against it in August 2016, that accused the Ivy League school of running its 401(k) plan in a way that cost participants too much. The case was among several similar “excessive fee” cases filed by the St. Louis law firm, Schlichter Bogard & Denton against large 401(k) plan sponsors.

According to a report by NAPA Net, the suit alleged that Yale breached its fiduciary duties to plan participants (Yale employees) by “selecting and imprudently retaining funds which the plaintiffs claim have historically underperformed for years” and had high fees. The complaint also questioned the plan’s decision to use multiple recordkeepers instead of single recordkeeper.

The plaintiffs had also charged Yale with failing to employ strategies that would lower recordkeeping fees, such as:

Installing a system to monitor and control fees

Periodically soliciting bids in order to compare cost and quality of recordkeeping services

Leveraging the plan’s “jumbo” size to negotiate for cheaper recordkeeping fees

Consolidating from two recordkeepers to one

Implementing a flat fee rather than a revenue-sharing structure

Yale argued that the plaintiffs failed to allege “that the fees were excessive relative to the services rendered.” The school’s plan trustees moved to dismiss all seven counts for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6) and for being time-barred.

Judge Alvin W. Thompson dismissed allegations that the Yale defendants acted disloyally in managing its retirement plan, and that participants were harmed by too many investment options.

Still active are claims that Yale was “locked-in” with recordkeeping services that kept the university from adequately monitoring the plan’s investments and fees, that the offering of retail class shares was a problem, and that there was a breach of fiduciary duty in failing to monitor the plan committee.

Yale is among more than a dozen universities to be sued over the past 30 months by 401(k) plan participants for not doing what the law requires to reduce the costs of the plans and the fees charged to participants.

Consumer debt undermines personal retirement savings: LIMRA

Posted on April 5, 2018 by Editorial Staff -

Just 31% of American workers with non-mortgage debt reported they were saving for retirement outside the workplace compared to 69% of workers without non-mortgage debt, according to a LIMRA survey. Non-mortgage debt includes car loans, student loans, credit card debt and home equity loans.

“Consumer debt is at an all-time high,” the life insurance industry organization reported. “As of the fourth quarter of 2017, the total household consumer debt reached $13.2 trillion.” About seven in 10 American workers currently hold non-mortgage debt and it is negatively affecting their confidence and ability to save for retirement.

Millennials with non-mortgage debt are the least likely to be saving for retirement outside of the workplace. Only 20% of Millennials and 34% of Generation X that have non-mortgage debt save for retirement outside of where they work. That percentage increases to 55% for Baby Boomers.

Millennials and Generation X workers might feel less motivated to save outside the workplace because of their non-mortgage debts. Non-mortgage debt not only increases negative feelings towards saving for retirement, but it also impacts American workers’ sentiment about debt. LIMRA finds that six in 10 American workers with non-mortgage debt say paying down debt negatively impacts their efforts to save for retirement and half feel they are spending too much of their annual income paying down debt. This is especially true for Millennials with non-mortgage debt.

Fifty-nine percent of Millennials believe they are spending too much of their income paying down their non-mortgage debt. This percentage decreases as the generations age as only 46% of Generation X and 39% of Baby Boomers felt the same.

Investors keeping selling US equity funds

Posted on April 5, 2018 by Editorial Staff -

Though the performances of U.S. equity funds and global equity funds were almost identical, their flows diverged widely in the first quarter. Even U.S.-focused funds suffered near record outflows, while funds focused outside the U.S. attracted plenty of fresh cash, according to TrimTabs research.

U.S. equity mutual funds and exchange-traded funds lost $63.3 billion last quarter, the second-highest quarterly outflow on record. U.S. equity ETFs issued just $11.3 billion, the second-lowest inflow in the past eight quarters, while U.S. equity mutual fund outflows remained relentless, totaling $74.6 billion.

Global equity funds had strong inflows for a fourth consecutive quarter–a three-quarter high of $63.9 billion–even though they didn’t significantly outperform their U.S.-focused counterparts. Global equity funds were down 0.5% on average, while U.S. equity funds declined 0.7%.

Demand for bond funds was heavy despite continuing losses. Retail investors dominated the buying. Bond MFs received $61.8 billion, commensurate with recent quarters, but bond ETF inflows dropped to $13.5 billion, the lowest level in five quarters.

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