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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.

Alcoa transfers DB risk to Sun Life and others

Posted on April 5, 2018 by Editorial Staff -

Alcoa Corporation has signed group annuity contracts to transfer approximately $555 million in obligations, and related assets, of defined benefit pension plans in Canada, the giant producer of bauxite, alumina, and aluminum products announced this week. The transfer will be completed later this month.

The group annuity contracts with three Canadian insurers will cover about 2,100 retirees or beneficiaries. Sun Life Financial, Desjardins Financial Security Life Assurance Company, and Industrial Alliance Insurance and Financial Services Inc. (IAFS) will begin making benefit payments to the affected plan participants by July 2018. The timing and amounts of retirees’ current monthly benefit payments will not change.

In the second quarter of 2018, Alcoa expects to record a non-cash settlement charge of approximately $175 million ($128 million after-tax, or $0.68 per share) due to these annuity transactions.

Alcoa will contribute approximately $95 million in mid-April 2018 to facilitate the annuity transaction and maintain the funding level of the remaining plan obligations. This amount represents a portion of the $300 million in incremental contributions Alcoa expects to make in 2018 to the U.S. and Canadian defined benefit pension plans.

Ascensus to buy ASPERIA

Posted on April 5, 2018 by No Author -

Ascensus, a retirement plan service provider serving seven million participants, has agreed to acquire ASPERIA Retirement Plan Solutions, a third-party administrator (TPA) firm for defined benefit and defined contribution plans. ASPERIA will join Ascensus’ TPA Solutions division.

Based in Worcester, Massachusetts, ASPERIA (formerly Group Health & Benefit Administrators, Inc.), will become part of Ascensus’ TPA Solutions division, according to a release from Ascensus president David Musto, Brian K. Carroll, ASPERIA’s president and CEO and Raghav Nandagopal, Ascensus’ executive vice president of corporate development and M&A.

Based in Dresher, PA, Ascensus supports over 54,000 retirement plans, more than 4 million 529 education savings accounts, and a growing number of ABLE savings accounts. It also administers more than 1.5 million IRAs and health savings accounts. As of December 31, 2017, Ascensus had over $163 billion in total assets under administration.

InsurMark receives infusion from Simplicity

Posted on April 5, 2018 by No Author -

InsurMark has sold an equity stake to Simplicity Financial Marketing Group Holdings, Inc., and thereby acquired the capital to complete its evolution from an insurance marketing organization to a “ “next-generation” independent distribution firm, InsurMark founder Steve Kerns announced this week in a release.

InsurMark now identifies as itself as ADO, or Advisor Development Organization. The repositioning is intended to reflect its emphasis on “helping advisor-clients optimize the value of their business and attain the lifestyle they desire,” the release said. Elite Advisor Group serves as a marketing consulting to InsurMark.

InsurMark, established in 1983 and headquartered in Houston, TX, specializes in distributing annuities and life insurance through financial professionals. Simplicity Group Holdings owns nine insurance distribution businesses and is one of the nation’s largest financial marketing organizations.

Household Spending by Age Cohort

Posted on March 29, 2018 by No Author -

A Pre-ICO Lunch at Gibraltar

Posted on March 29, 2018 by Kerry Pechter -

The crypto-currency entrepreneur Dean McClelland met me for lunch in a swank restaurant near the foot of the legendary white rock of Gibraltar on a February day when the wind from the Mediterranean blew strong enough to topple the scaffolding on one of the tiny British tax haven’s half-finished high-rises.

After renting a Fiat 500 in Seville, I drove two hours south past olive orchards and down the corrugated length of Parque Natural Los Alcornocales to Gibraltar, where McClelland’s company, TontineTrust, is based. He aims to build a global retirement income fund based on a proprietary crypto-currency and a tontine.

We sat down to a white-tablecloth meal in a near-deserted restaurant. McClelland ordered beer and I ordered red wine. He’s a ruddy-faced Irishman of 47 with a chinstrap beard. He wore a dark pinstripe suit. I cannot say that I peered into his soul and took his measure. Only presidents can claim to do that.

We had already spoken via Skype for a recent RIJ article. But there were two questions I wanted to explore further. The first question: Didn’t it seem quixotic to try to launch a product based on two strange ideas that most people don’t understand?

McClelland looked at me just long enough for the tacit message of “You don’t really get it yet” to appear in a word bubble above his head. He explained, and I began to catch on. Trapped in my retirement income perspective, I had wrongly imagined that the crypto-currency piece might be a drag on the tontine part.

In fact, it’s the hook. Crypto-currencies are, of course, today’s hottest investment category outside of cannabis, especially among the young, those with loose cash, and people who don’t trust the value of “fiat” currency, like euros and dollars.

McClelland’s tontine is denominated in a crypto-currency called TON$. To invest in tontine shares, or even to distribute it (as an advisor), you must buy and hold TON$. A retiree would be betting not only on the chance for an attractive payout from the tontine, but also on the chance that the market value of the TON$ will soar. Where an income annuity offers retirees a dead-stick landing (no way to regain altitude), a crypto-currency tontine has no ceiling. At the very least, it’s a diversification play.

So, are lots of people taking a flyer on TontineTrust? No and yes. McClelland said that the board members of a famous company that owns an insurance company was recently interested in investing in Tontine until the chairman—a famous person, but I won’t indulge in hearsay—shot it down.

Nonetheless, he said, accredited investors ($1 million+) have been sending chunks of money to TontineTrust in response to its call for pre-ICO (initial coin offering; in this case, McClelland’s TON$) financing. That call was sweetened by the promise of 200% bonuses to early investors.

Risk-averse investors would never go near such a thing. As one person emailed me, “I love the tontine idea but this product seems to be negligent or purposely fraudulent.” But it’s catnip to those with a big appetite for risk. (Or those who believe that, if you get into something early enough, you’re not paying much for the risk.)

My second question, a difficult one to craft politely, was, in effect: Who is Dean McClelland (at left, beardless), and why should people invest in his company, or, as mere participants in the tontine, trust him with their retirement savings? He’s not, for instance, the kind of recent Ivy League (or Stanford) graduate that private equity firms seem to love tossing money at. He had no special answer, except to shrug almost imperceptibly and say that he’d been an investment banker.

That question (a version of the “Who sent you?” challenge that speakeasy owners classically threw at new patrons) has been answered, in part, by the people who have decided to go to work with or for TontineTrust. I know of two. Richard Fullmer, the asset allocation expert, confirmed in a recent email that he had left T. Rowe Price to become chief investment officer at TontineTrust. Fullmer, who created a novel retirement income strategy when he was at Russell Investments (described in the 2011 book, Someday Rich) and designed target-date fund strategies for T. Rowe Price, is respected in the academic and professional money management realms.

Also working with McClelland is Brian Bossler. A former chief operating officer at RetireUp (the robo-advice platform for small 401(k) plans), Bossler now holds that position at TontineTrust. McClelland had been looking for someone who had brought a product to market in the US. Bossler had done that with RetireUp.

The rest of the story is yet to be written. McClelland and I shook hands and parted. On my way back to the parking garage where I’d left the rental car, I walked as close as could to the famous Rock. It meets the ground the way a skyscraper in Manhattan meets the sidewalk: at a right angle. I gazed straight up at the soaring limestone wall, almost expecting see the logo, Prudential.

It’s Hot Around the ‘Collar’

Posted on March 29, 2018 by Kerry Pechter -

With the equities boom showing signs of fatigue, and with so many investors near retirement, it’s no wonder that collar-type products, which insulate investors from various levels of downside risk, have become a fertile area of innovation for both life insurer actuaries and the financial engineers on Wall Street.

A number of insurance-based and investment-based versions of these accumulation-oriented products are now available. Starting with AXA in 2010, a half-dozen life insurers have developed structured or indexed variable annuities with collar-like capabilities. And a Wheaton, Illinois-based ETF firm is awaiting SEC approval for what it calls the first options-based ETF with such features.

In February, Great-West Financial introduced its first indexed variable annuity (IVA), Capital Choice. In a departure from previous IVA designs, it offers contract owners a choice of four indexes and either a buffer or a floor. That is, investors can choose to absorb either all loss down to a 10% floor or all net loss beyond a 10% buffer.

On the investment side, Innovator Capital Management (ICM) has plans to introduce four “Innovator Defined Outcome ETFs,” each holding a select basket of puts and calls on the S&P 500 Index. Each fund delivers returns within a different range of upside caps and downside buffers. Milliman Financial Risk Management, a subsidiary of Milliman, Inc., is the product’s subadvisor. It, along with Cboe and S&P Dow Jones, designed the options-based methodology.

For advisors who might use either an investment or an insurance product to protect their near-retirement and newly retired clients from market volatility (i.e., sequence risk) during the risky “retirement red zone,” we thought it would be useful to look at these two somewhat similar products side by side.

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 1.20% per year and the six-year surrender period starts with a 7% penalty.

“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 (right), 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 120 basis points. 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 1.20%. That will be a differentiator for us.”

Innovator Defined Outcome ETF Series

ICM needed a special SEC ruling to be able to offer their basket of puts and calls on the S&P 500 as an ETF. There are four versions of the ETF, each with a difference risk/reward trade-off and each with a “defined outcome” (within a specific range) based on specific one-year periods. The expense ratio is expected to be 79 basis points.

“It’s a simple, transparent investment in a basket of six to eight options contracts. We’re essentially using options to replicate structured note-like payoffs inside an ETF,” said Bruce Bond, co-founder of ICM, in an interview. “This product gives you performance up to a cap, and a defined downside protection level over the course of approximately one year. You don’t know exactly what you’ll get. But you know it will be between certain parameters.”

The four versions of the ETF are the Innovator S&P 500 Buffer, the Innovator S&P 500 Enhance and Buffer, the Innovator S&P 500 Power Buffer, and the Innovator S&P 500 Ultra. The caps on upside potential haven’t been declared, and won’t be until the start of one of the funds’ one-year “outcome periods.” Here’s a brief description of each ETF:

The Innovator Buffer insulates investors against the first 15% of S&P 500 Price Index losses during the “Outcome Period.” Investors bear all S&P 500 Price Index losses exceeding 15% on a one-to-one basis.
The Enhance & Buffer Fund insulates investors against the first 10% of S&P 500 Price Index losses during the Outcome Period. Investors bear all S&P 500 Price Index losses exceeding 10% on a one-to-one basis.
The Power Buffer Fund provides a buffer against S&P 500 Price Index losses of between -5% to -35% during the Outcome Period. Investors bear the first 5% of S&P 500 Price Index losses and all S&P 500 Price Index losses exceeding 35% on a one-to-one basis.
The Ultra Fund provides no downside protection, and aims instead to maximize upside.

These are open-ended, fully liquid funds, and investors can buy or sell at any time. As noted in the Innovator prospectus, the caps and buffers apply only to money that comes into the funds at the beginning of each designated one-year period. Bond said that there will be up-to-date information on the Innovator website to show new investors where the funds are in their one-year trips through the market. People who buy and hold will already be in the fund when it starts a new cycle of option purchases.

“If we launched the Innovator Defined Outcome ETFs today, and you bought, for example, the Innovator S&P 500 Power Buffer, which is designed to provide upside exposure to the S&P 500 Price Index, up to a cap, and a downside protection level between -5% and -35%, you’d be able to earn up to an 8% or 9% cap, if the product were struck today, and you’d have a downside buffer of 30%, beginning at -5%,” Bond said.

“But if you bought it 100 days after the launch, the S&P 500 might already be down 15%—and there would be less ‘protection’ left. Or, on the flip side, the index might be up 4%, in which case you may only get five more percentage points of growth before hitting the cap.”

It’s not clear whether these timing implications pose any greater hazard to an investor in the Innovator ETF than in an indexed variable annuity like Capital Choice, as long as the investor knows what he has and hasn’t purchased. With a product like Capital Choice, the insurance company can change the caps in response to market developments, so that people who buy at different times will see different risk/protection combinations.

Sales potential

Both ICM and Great-West see lots of potential for this type of semi-protected product when millions are investors are either holding cash or sitting nervously on a pile of unrealized capital gains. Matt Kaufman, a principal at Milliman, expects a ready market among advisors who may not use structured notes or insurance products.

“When we talk to financial advisors, they often ask, ‘How else can I access a defined outcome strategy?’ For the portion of their clients who are looking for alternatives notes to structured notes or structured annuites, this gives them similar opportunities, through a low-cost, efficient vehicle like the ETF,” Kaufman told RIJ.

Milliman, which serves as a sub-advisor to variable annuity subaccounts, uses a managed risk strategy in many of those portfolios. But for this product it chose an options-based approach. “Many managed risk strategies focus on providing investors with stable volatility and downside risk management,” Kaufman said. “Innovator Defined Outcome ETFs are different. Like many structured notes and annuities, they are less focused on volatility and more on the outcome parameters they can provide.”

For Great-West’s Carlson, the Capital Choice product is part of a long-term strategy to expand Great-West’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.”

No surrender penalty on Jackson National’s new advisory FIA

Posted on March 29, 2018 by Kerry Pechter -

Jackson National Life, the 2017 leader in overall annuity sales ($18.39 billion) and variable annuity sales ($17.46 billion), has launched a new fixed indexed annuity (FIA) with an income benefit in both commission-based versions.

The two versions of the product are MarketProtector, for use by commissioned agents and brokers, and MarketProtector Advisory, for investment advisor representatives at Registered Investment Advisors (RIAs). The no-commission version of the contract has no surrender charge period, which should appeal to RIAs.

There are two all-equity index options: the S&P500, which contains domestic large-cap stocks, and the MSCI-EAFE, which includes European and Asian stocks. The crediting options are annual reset point-to-point and annual reset point-to-point performance trigger (which performs best in flat, but not negative, one-year periods).

The product’s lifetime income rider, IncomeAccelerator, might be its most interesting feature. Most living benefit riders incentivize contract owners to delay withdrawals by raising the value of the notional “benefit base.” IncomeAccelerator ratchets up the client’s annual withdrawal percentage each year until the client turns on the guaranteed income stream (for up to 15 years or to the client’s 85th birthday, whichever comes first).

Historically, owners of living benefit riders have struggled to understand how they work. They often confuse their account values and their notional benefit bases. Many mistakenly believe—and are sometimes encouraged to believe—that an annual increase (“roll-up”) in their benefit base means an increase in their available balance.

Income Accelerator can be added after purchase or dropped after purchase, allowing clients to change their minds about how they’ll use the product. If they bought the benefit and don’t plan to use it, they can stop paying for it.

“The way we’ve designed it, a client and advisor can add or subtract the living benefit rider at any time,” said Marilynn Scherer, vice president, fixed product management, at Jackson. Clients also have the flexibility to take withdrawals during the deferral period and not lose their deferral bonus. The income rider, which currently costs 1.05% a year for the single life version and 1.20% for the joint life version, is available only on the seven-year and 10-year versions of the product.

“In other products, or in earlier versions of other products, withdrawing even an incidental amount would lock you into a payout rate,” Scherer said. “But with this product, you can take an incidental withdrawal, and in future years your payout percentage could go up again.”

In 2009, Jackson was among the top five sellers of FIAs according to Sheryl Moore, publisher of Wink’s Sales & Markets Report, which includes FIA sales. Between 1998 and the end of 2016, it was the eighth largest seller of FIAs, with cumulative sales during that period of $18.9 billion. In 2017, it ranked 20th, with FIA sales of $584.7 million.

“Unlike some of our competitors, we haven’t jumped onto certain product features—like the hybrid indices,” Scherer told RIJ. “We’ve stayed with conventional FIA products. That’s why we dropped in the rankings in the last few years.

“Early on, we decided to file our FIA materials with FINRA, and we abide by FINRA rules,” she added. “So we couldn’t illustrate any product that didn’t have a sufficient number of years of performance. We also heard from some of our broker-dealers that they wanted to use indices that people could look up in their newspapers.”

Moore believes that eliminating the surrender charge from the advisor version of the product could spark demand for FIAs in the RIA channel. “The first fee-based indexed annuity launched less than 25 months ago and already there are 20 different products available from 10 different companies. I consistently receive feedback [from RIAs] that they are disappointed in the offerings because of the surrender charges on the annuities,” she told RIJ. All of the commission-based versions (5, 7 and 10-year terms) have a first-year surrender charge of 9%.

“If that is [the RIAs’] only hangup [about FIAs], MarketProtector Advisory may be a game changer,” she said. “Fee-based indexed annuity sales accounted for just 0.42% of 4Q2017 sales, but this could open that up in a big way.”

Getting rid of the surrender charge was part of Jackson’s strategy. “The first few carriers who offered advisory FIAs had traditional descending surrender periods. It look like they had been built on a commissioned product chassis. The more recent ones have a flat 2% surrender fee. We wondered if we should follow suit,” Scherer said.

“But our actuarial team said we might not need a withdrawal charge at all. They were comfortable that the market value adjustment would cover [the risk of disintermediation]. Also, since this is advisory money, it’s likely to be sticky anyway. Nobody would jump from advisor to advisor to chase performance.

“I could imagine a number of way to use the product. Sheryl Moore’s data shows that the average FIA purchase age is 63. Some people might buy the product at that age and turn on income immediately. It would be easy for them to calculate what their income stream is going to be.

“But if you use the deferral credits and get maximum value out of the product, I could see people deferring for five or seven years. They might buy it at age 60 and defer until age 65. Or buy it at 65 and defer until it’s time to take required minimum distributions. That’s when most people start thinking about taking income.”

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