Archives: Articles

IssueM Articles

Financial Engines purchased by private equity firm

Posted on May 3, 2018 by Editorial Staff -

In a sign of further consolidation in the investment management business, Hellman & Friedman agreed to acquire Financial Engines, the Sunnyvale, Calif.-based advisory firm co-founded in 1996 by Nobel Prize-winning economist Bill Sharpe, for $3 billion.

The San Francisco-based private equity firm is paying $45 a share. Shares of Financial Engines, which has been called the original “robo-advisor,” rose 32% to $44.73 at 2:42 p.m. in New York trading last Monday, according to Bloomberg.

Life insurers, asset managers and private equity firms are buying investment managers as the sector automates and margins collapse. Investors increasingly rely on computers—rather than people—for money advice. The industry also faces the costs of complying with new rules in the U.S. and Europe aimed at improving fee transparency.

There were 208 asset management deals worth $21 billion in 2017, according to a research note in February from Sandler O’Neill & Partners, an investment banking firm. Combined deal values were up about 23% from the previous year.

The Financial Engines transaction is the fourth-largest takeover of an asset or wealth manager since the beginning of 2017, according to data compiled by Bloomberg. Others were:

Standard Life Plc’s mergerwith Aberdeen Asset Management Plc to form the U.K.’s largest active manager in a $4.5 billion deal.
Jiangsu Shagang Co.’s proposal to buy Suzhou Qinfeng Investment Management Co. for more than $3 billion
Softbank Group’s $3.1 billion cash dealfor Fortress Investment Group LLC
The acquisition by Aberdeen Standard Investments, Standard Life Aberdeen Plc’s money manager, of the U.S. business of ETF Securities, which specializes in precious metals and commodity exchange-traded products and has about $2.8 billion in assets
Nippon Life’s purchase of a near-25% stake in Los Angeles-based money manager TCW Group Inc. from Carlyle Group LP in a deal valued at 55 billion yen ($500 million)

Financial Engines primarily helps companies offer their employees 401(k) plans, individual retirement accounts and other types of savings plans. As of Dec. 31, it provided those services to more than 700 employers, representing about 9.8 million workers and more than $1.2 trillion in assets, according to its annual report. It also manages more defined contribution accounts than rivals including Morningstar Inc. and Fidelity Investments, according to an investor presentation in February.

The company earned $47 million last year, or 63% more than in 2016, as its purchase of the Mutual Fund Store drove revenue higher. Co-founded in 1996 by economist William Sharpe, Financial Engines went public in 2010.

Hellman & Friedman has a history of investing in money managers. In the past it has owned stakes in Artisan Partners Asset Management Inc., LPL Financial Holdings Inc. and Franklin Resources Inc., according to Hellman & Friedman’s website.

Undersaved? Work a little longer

Posted on May 3, 2018 by Editorial Staff -

Working a little longer, and postponing the start of Social Security benefits, can partly make up for under-saving over several decades of work, according to a recent article from the National Bureau of Economic Research, “The Power of Working Longer.”

The study’s authors found that working only three to six months longer boosts retirement income by as much as increasing retirement contributions by one percentage point over 30 years of employment. For a 62-year-old, working until age 70 would increase retirement income by at least 40% percent and more than 100% for some individuals.

“The results are unequivocal,” the paper said. “Primary earners of ages 62 to 69 can substantially increase their retirement standard of living by working longer. The longer work can be sustained, the higher the retirement standard of living.”

The finding applies to single adults and the primary earner of married couples, and across a broad range of earnings levels, wrote authors Gila Bronshtein, Jason Scott, John B. Shoven and Sita N. Slavov.

Older workers who are 10 years away from retirement and who decide to work one month longer at the end of their careers can get the same increase in retirement income as they can by adding one percentage point to their retirement saving rate over 10 years.

The findings are considered to be of special relevance to older workers, who may not be able to save more or have time to benefit from switching to a low-cost portfolio.

Additional years or even just months of work allow workers to contribute more to their retirement accounts. Delaying withdrawals from those accounts allows more time for them to grow. Waiting longer before buying an annuity means the annuity will be cheaper. (The researchers assume that at retirement a worker buys an inflation-indexed joint survivor life annuity, in part because it harmonizes the benefits of private savings and Social Security, which is also an inflation-indexed, joint-survivor annuity.)

The largest factor, however, is the increase in Social Security benefits from claiming later. If an average 66-year-old works one year longer, and claims Social Security at age 67, he or she will see a 7.75% rise in annual retirement income, the researchers calculate. Some 83% of the gain comes from the rise in Social Security benefits.

The lower one’s income, the larger the gain in Social Security benefits from additional earnings. A lower wage worker needs to work only 2.1 months longer to equal the benefit of 30 years of saving an extra percentage point of income, while a higher wage earner has to work 4.4 months longer to get the same benefit.

Honorable Mention

Posted on May 3, 2018 by Editorial Staff -

Principal in financial wellness deal

Principal Financial Group is partnering with ARAG, a leader in legal insurance, to roll out access to a legal document resource for retirement plan participants. This resource had previously only been available to group life insurance customers as part of the financial wellness resources Principal makes available to help people manage their financial future.

“With this new relationship, people can now take immediate action regarding their financial wellness and risk planning by preparing a will, healthcare power of attorney and more,” a Principal release said.

Many Americans report struggling with risk and protection planning, the release said. Only 26% of Americans have a complete will that is up to date and 71% don’t know how to get started with legal matters.

For individuals looking for a place to get started with risk planning, Principal, along with ARAG, provides education and resources. Once forms are filled out in the system, individuals can take steps to formalize their plan, often by taking their documents to a notary.

Lincoln Financial completes acquisition

Lincoln Financial Group has completed its previously announced acquisition of Liberty Life Assurance Company of Boston, expanding its benefits market position across all size employers. The transaction included reinsuring Liberty’s Individual Life and Annuity business to Protective Life Insurance Company.

With this acquisition, Lincoln Financial ranks first in market share in combined fully insured disability sales and third in combined total life and fully insured disability sales. Its group benefits organization now serves approximately 10 million employee customers across the U.S., through product offerings that include Disability, Life, Dental, Vision, Critical Illness, and Accident insurance, plus a full suite of absence management services.

The acquisition was financed with cash and the issuance of debt and is expected to be accretive to Lincoln Financial’s earnings per share in 2019, excluding integration costs.

Goldman Sachs & Co. LLC acted as financial advisor to Lincoln Financial and Wachtell, Lipton, Rosen & Katz and Sidley Austin LLP acted as legal advisors. Barclays acted as financial advisor to Liberty Mutual, and Skadden, Arps, Slate, Meagher, & Flom LLP acted as legal advisor.

Protective Life Corporation, a unit of Dai-ichi Life Holdings, Inc., said that its principal subsidiary, Protective Life Insurance Co., and Protective Life & Annuity Insurance Co., completed the transaction with Lincoln Financial Group to acquire via reinsurance substantially all of the individual life and annuity business of Liberty Life Assurance Company of Boston.

The reinsurance transaction closed in conjunction with Lincoln’s acquisition of Liberty Life from affiliates of Liberty Mutual Group Inc. The transaction was originally announced on January 19, 2018. The transaction is expected to represent a capital investment by Protective of approximately $1.2 billion.

The link between 401(k) litigation and in-plan annuities

Posted on May 3, 2018 by Editorial Staff -

So-called “401(k) lawsuits” have roiled the retirement industry in recent years. They’ve disrupted revenue-sharing practices in workplace savings plans, generated a windfall for a handful plaintiffs attorneys, and forced plan sponsors to take their duties as fiduciaries more seriously.

The suits may also have made plan sponsors warier than ever about offering an annuity as an investment option inside their plans. If so, that might disappoint those who hoped to see 401(k) balances serve as a direct source of guaranteed lifetime income.

This assessment is mentioned (though not examined in depth) in a new Issue Brief from the Center for Retirement Research (CRR) at Boston College. ERISA lawyers in particular should appreciate this article: The paper’s appendix compiles the hundreds of 401(k) lawsuits brought in the past decade..

Here’s what George S. Mellman, an institutional investment consultant, and Geoffrey Sanzenbacher, a CRR analyst, wrote about in-plan annuities:

“One open question is whether the fear of litigation prevents the use of creative options that may improve participant outcomes – like investment vehicles designed to provide a lifetime income stream when participants retire.

“So far, these options have not caught on and it is unclear what role litigation has played. After all, offering an annuity option would involve more complexity than passive investments (and thus higher fees) and would require the plan to choose a provider, which itself entails some risk.

“Yet, such options would likely improve retirement security. To the extent the fear of litigation does play a role, retirees may benefit from more government clarification on how plans can offer drawdown products in ways that protect them from any legal consequences.”

The balance of the report is dedicated to a review of the complaints that motivated the lawsuits and the impact that the threat of litigation is having on the retirement plan industry. The report documents a rise in the use of low-cost index funds and a decline in investment and administrative expenses as results of litigation.

In a recent email to RIJ, Mellman offered these comments:

“For awhile, I’ve been curious about why there’s been so little implementation of in-plan annuity options,” he wrote.

“In 2014, the Treasury Department, IRS, and DOL issued guidance on how deferred income annuities could be included in target-date funds. Plan sponsors and their consultants know both that older workers worry about post-retirement cash flows and market volatility, and that many near-retirees were totally unprepared during the economic crisis ten years ago when nearly all asset prices collapsed.

“So, despite the needs and potential availability of new in-plan annuity tools, I now wonder about the extent that plan sponsors’ litigation fears have stifled innovation. Especially since the onset of increased litigation, more plan sponsors have expressed fears of being on the ‘bleeding edge’ of investment lineup innovation, and this fear seems to be stronger than for innovation in other areas of plan design and plan operations.

“This is especially true for changes in investment offerings that don’t directly lower plan or participant costs—invariably, avoiding litigation is one of the reasons cited. A formal survey would be an appropriate follow-up activity.”

A Social Security Trial Balloon

Posted on April 26, 2018 by Kerry Pechter -

As many of us are painfully aware, our 83-year-old Social Security system faces a deadline. Only 16 years remain before its revenues will cover only about 75% of its promised payouts. Unless a credible fix emerges soon, we could end up with a hasty, 11th-hour patch-job in 2034. Even now, many Millennials expect a lump of coal at retirement.

One fresh proposal—among seven winning responses to a 2016 “AARP Policy Innovation Challenge”—calls for the creation of new savings accounts that would give Americans enough money to delay Social Security claiming until age 70 and thereby reap higher annual benefits for life.

(For a look at the seven (out of 20) winning proposals, click here.)

Warning for those sensitive to government-led solutions: The following proposal entails a government mandate, slightly higher payroll taxes, notional individual accounts, and a centrally managed, federally supervised pool of target date funds with limited pre-retirement liquidity.

The new accounts are called Supplemental Transition Accounts for Retirement, or STARTs. (They were conceived by Gary Koenig (below right), vice president of Financial Security at AARP’s Public Policy Institute, and developed with assistance of Jason Fichtner, a former Social Security official now at the conservative Mercatus Center at George Mason University, and William Gale of the liberal Brookings Institution.

Big picture: There’s a battle shaping up over retirement policy, and whether the public sector or the private sector can, will, or should address the fact that as many as half of U.S. workers have no retirement savings option at work. California and Oregon have moved ahead with state-sponsored “auto-IRAs.” The private sector wants industry-led “open multiple-employer plans.”

STARTs are just one policy trial balloon, and here’s they would work:

The accounts would be funded by employees and employers. There would be an additional government contribution for low-income households, paid for by taxing START distributions.
Each worker and employer would contribute 1% of earnings (2% combined), up to the annual maximum subject to Social Security payroll tax ($127,500 in 2017), to the worker’s START. The federal government would contribute up to 1% to the STARTs of low-income workers. Employee contributions would be after-tax and employer contributions would be pretax.
The self-employed would make required contributions as both employer and employee. For married couples, total contributions would be split equally between each spouse’s START.
Retirees could only receive what they put in, plus investment gains. As a result, people closer to retirement would have smaller START accounts. The investment gains would not be “smoothed” or “buffered.” Individuals could have different outcomes and experience sequence-of-returns risk.
Beneficiaries could begin to receive monthly START benefits at the earliest eligibility age (62, in most cases) but would not be required to do so. Each worker would be required to exhaust START assets before receiving Social Security benefits.
The amount of monthly START benefits payable under the proposal would be limited to the Social Security benefits that the beneficiary would have received under current-law claiming rules.
At full retirement age (age 67 for people born in 1960 or after) and up to age 70, beneficiaries could use START assets without restriction (e.g., taking a lump sum). At age 70, account holders with START assets would be required to take a full lump-sum distribution, or roll the balance into a retirement account or a beneficiary’s START. Any money remaining in a START at the time of the account owner’s death would go to a designated beneficiary.

In an interview this week with RIJ, AARP’s Gary Koenig said that the proposal is primarily intended to increase the adequacy of Social Security benefits through delayed claiming. But the STARTs would also reduce Social Security’s anticipated funding shortfall by about 12%.

“We’re not guaranteeing any specific return,” Koenig said. “An independent board would set the glide path. Then the funds would be privately managed, the way BlackRock manages the target date funds in the federal employees’ Thrift Savings Plan (TSP), but with multiple managers. We allow access to the account only if you have one of the serious health conditions that qualify for Social Security disability.”

Eugene Steuerle, a Social Security expert at the Urban Institute, said the START proposal would publicize the advantage of delaying Social Security benefits until age 70. “The proposal clearly tries to steer people to recognize what a good deal the current actuarial formulas provide for retirement,” he said.

“I like the idea of convincing people, at least under the current regime, that many of them ought to spend down existing monies (or, in the case of STARTs, mandatory monies) first so as to get the benefit of the delayed retirement credits and the actuarial benefits from not withdrawing before the normal retirement age.

“My main worry rests locking in parameters for decades into the future, e.g., on an early retirement age of 62 or even a normal retirement age in a world where we soon are expect to have 1/3 of adults retiring for close to 1/3 of their adult lives. Another issue is that the delayed retirement credit formula ought to be fixed and made more actuarially fair.”

Alicia Munnell, director of the Center for Retirement Research at Boston College, was skeptical about the likelihood of raising taxes, telling RIJ in an email that “Social Security deficits preclude spending money elsewhere.” In her column today at Marketplace.com, she wrote this about STARTs:

“Despite all the strengths of the proposal, it faces a tough future. Essentially, it raises the payroll tax rates by 2 percentage points and uses that money to start a new program rather than to close [Social Security’s] 2.83% [of taxable payroll] 75-year deficit. That is a tough sell.

“But STARTs made me think about other ways to use the proposal. What if, up until the full retirement age, people could not claim their Social Security benefits until they exhausted some portion—say, half—of their 401(k)/IRA balances? That requirement would counter people’s resistance to drawing down their nest egg and enable them to purchase the best annuity in town!”

About those government contributions: The maximum would be 1% of earnings for married couples filing jointly with adjusted gross income (AGI) less than $40,000, single filers with AGI less than $20,000, and head of household filers with AGI less than $30,000.

The government contribution would be phased out over an AGI range of $10,000, $7,500, and $5,000 for joint filers, head of household filers, and single filers, respectively. For example, the government contributions for joint filers with AGI of $42,500 would be 0.75% and with AGI of $45,000 would be 0.5%.

Workers in low-income households would receive a total START contribution of up to 3% of earnings. The government contribution would be treated like an employer contribution and would not be included in current taxable income.

With FIA Caps, Higher is Better

Posted on April 26, 2018 by Kerry Pechter -

After the financial crisis, the fixed indexed annuity (FIA) emerged from its original habitat in the independent insurance agent channel to compete against certificates of deposit in the bank channel and (when combined with an income rider) with variable annuities-with-living-benefits in the broker-dealer channel.

With its disarming marketing hook—equity-linked upside with no risk of loss—the FIA seems to answer the anxieties of sidelined investors. And recent retooling (into no-commission FIAs and “index-linked structured annuities”) has only broadened its appeal. Though the Department of Labor’s “fiduciary rule” has slowed FIA sales, the effect may be temporary.

But FIAs, which first appeared in 1995, have always been hard to benchmark. The product’s complexity, opacity and “manufactured returns” defy easy comparison. The best readily available public data is six years old—a study by Advantage Compendium showed an average annualized index annuity return of 3.27% over the period from 2007 to 2012. WINK (www.looktowink.com) produces a ton of information about FIAs for its subscribers, but not performance information. Anecdotally, FIAs have produced single-year returns as high as 12%.

Now CANNEX, the annuity data vendor, has released a report that measures the yields of commission-paying FIAs with a variety of crediting methods against the yields of multi-year guaranteed rate annuities (MYGAs). The report is entitled, “Accumulation Value of Fixed Annuities (MYGA & FIA): Understanding Yield by Product Design.”

CANNEX looked at 14 FIA products from six life insurance companies. Within that sample, the team “calculated the average annualized rate of return for each seven-year FIA contract… along with the distribution of returns across 10,000 market simulations for the S&P 500 Index.” The results were randomized rather than pulled from market history.

The report demonstrates—and this conclusion may feel self-evident—that contracts with the most generous performance caps and participation rates (or, better yet, no caps at all) do best against the MYGAs issued by the same companies when run through 10,000 Monte Carlo simulations of S&P500 Index returns.

The study depicts a horse race between MYGAs and FIAs as well as a horse race between FIA crediting strategies. (The analysts measured each FIA contract’s performance against the performance of the same issuer’s MYGA because the same interest rate assumptions presumably go into both.)

The results prove more or less what a lot of FIA watchers assume anyway: That the annual point-to-point method is best and that higher caps are better than low caps and no caps are better than a high cap—all else being equal (although all else is never equal).

The two contracts with uncapped S&P500 strategies in the study offered the highest returns relative to the MYGAs issued by the same two companies. Of those two, the contract with a higher participation rate (45% v. 40%) offered the highest average over seven years: 5.1% for the FIA v. 3.15% for the same company’s MYGA.

The products that on average tend to exceed the MYGA returns had the following strategies:

Annual point-to-point with a higher rate cap (between 5.85% and 6.10%) and 100% index participation
Annual point-to-point with no rate cap and an index participation rate less than 100%
Average monthly return with a high rate cap (6.5%) and 100% index participation

The products that on average performed less well than their MYGA counterparts included these strategies:

Annual point-to-point with a lower cap rate (between 4.00% and 4.50%) and 100% index participation
Annual performance-triggered with a declared rate
Monthly sum

On average, however, the differences between FIA and MYGA returns was thin, this study showed. When the team compared the averages with the yields of the most competitive seven-year MYGA return from the same carrier, they found an average for all seven-year MYGAs of 3.08% and for FIAs of 3.26%.

On the risk-reward spectrum, FIAs are evidently closer to fixed annuities than they are to equities. “People make such a strong connection between FIAs and equity indexes, but FIAs don’t perform like equities,” said Tamiko Toland, head of annuity research at CANNEX.

“They’re really a fixed product, and their performance is commensurate with fixed products. Our study gives you a range of returns, and shows that you could get less than a MYGA with an FIA. It depends on what your conviction is about the equities market. FIAs are for people who are willing to take more risk to get a higher yield than the MYGA offers.”

The CANNEX study was criticized by Sheryl Moore, CEO of WINK, which tracks sales and other data on indexed annuities. “As the recognized expert in the indexed annuity space, I put no salt in the findings in the CANNEX ‘research,’” she told RIJ in an email.

“This information is not consistent with my nearly 20 years of product administration, illustration development, and product development experience,” she wrote. “CANNEX is comparing apples-to-oranges here. Indexed annuities shouldn’t be compared to MYGAs; they are comparable to fixed annuities with a one-year rate guarantee.”

In reporting the results of their study, CANNEX maintains the anonymity of each carrier. If companies that subscribe to CANNEX data could identify the carriers—they can’t at this point, according to Toland—they might use such benchmarking data to support their claims of having a decision-making process that demonstrates their pursuit of the clients’ best interests.

The study doesn’t encompass FIA contracts that include some of the more recent innovations, such as custom or hybrid indices, index-linked structured annuities that permit losses up to a floor or beyond a buffer, or lifetime income benefits.

More comparative FIA should help confirm or deny the legitimacy of FIAs and, depending on the results, make advisors either more or less confident about recommending them.

Fund Flow Report

Posted on April 26, 2018 by No Author -

Fund flows bounce back in March: Morningstar

Posted on April 26, 2018 by Editorial Staff -

In March, investors pulled $10.5 billion out of U.S. equity passive funds, compared with $8.4 billion in the previous month. On the active front, investors pulled $11.0 billion, compared with $17.7 billion in February, according to Morningstar, Inc.

Highlights from the report include:

Taxable-bond and international-equity funds were the leading category groups, with net flows of $15.9 billion and $13.3 billion, respectively.
March’s inflows across all category groups were nearly $13.4 billion, compared with $7.7 in outflows in February.
The Morningstar Categories with the highest inflows in March were foreign large-blend, ultra-short bond, and intermediate bond funds with inflows of $13.5 billion, $6.0 billion and $4.8 billion, respectively. On the bottom-flowing list in March, large blend continued to see the most outflows of $19.0 billion while high-yield bond experienced outflows for the sixth consecutive month.
Among top U.S. fund families, Vanguard was the leader in net flows with $14.8 billion in March and approximately $59.0 billion for the quarter, down from the $116.5 billion collected in 2017’s first quarter, and which represents the fourth consecutive quarter of declining inflows.
Among all U.S. open-end mutual funds and ETFs, Vanguard Total International Stock Index, which has a Morningstar Analyst Rating of Gold, had the highest inflows of $5.3 billion. Silver-rated iShares Core MSCI EAFE ETF and Gold-rated Vanguard Total Stock Market Index followed with inflows of $4.7 billion and $4.6 billion, respectively. On the bottom-flowing list in March, Gold-rated SPDR S&P 500 ETF had the highest outflows of $15.0 billion.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

Broker-dealers will need scale or specialization: Cerulli

Posted on April 26, 2018 by Editorial Staff -

Margin pressures continue to rise for broker/dealers (B/Ds) and firms will need either scale or niche specialization in order to compete successfully, according to a new report from Cerulli Associates, the Boston-based global consulting firm.

“Margins are getting squeezed across every channel,” said Kenton Shirk, director of Cerulli’s intermediary practice, in a release. “B/Ds are challenged by explicit costs related to technology, operations, and compliance, as well as implicit costs causing a reduction in return on assets (ROA).”

ROA is declining for several reasons. “As advisors have adopted passive strategies, ETF structures, and institutional share classes, revenue-sharing to B/Ds has decreased,” the release said. The migration to the [Registered Investment Advisor] model, which has caused the greatest impact for independent B/Ds (IBDs), is another factor.

“Mega teams” have shown a preference for autonomy and economics of the RIA channel, Cerulli said. They either affiliate with a B/D’s RIA platform or move altogether to affiliate directly with an RIA custodian. The loss of these assets, or the shift of assets into less profitable platforms, puts downward pressure on ROA.

In responding to margin pressure, B/Ds have used their access to advisors to renegotiate revenue-sharing agreements with asset managers and promote strategic marketing partnerships and data packages, according to Cerulli.

But the added pressure is causing asset managers to reevaluate strategic partnerships. Nearly 90% of national sales managers say they are evaluating partner firm relationships on the basis of return on investment more than they did five years ago.

“Small B/Ds are ill-equipped to shoulder losses to their already thin profit margins, and consolidation will accelerate,” says Shirk. “The impact of these challenges has been masked by market growth. Still, some boutique B/Ds are joining larger IBDs and becoming large Offices of Supervisory Jurisdiction. The move allows them to lean on the IBD’s scale and infrastructure, but still maintain a reasonable degree of autonomy.”

Wirehouses have also adjusted strategies in response to margin. “While the wirehouses are well positioned with a highly productive advisor-force that boosts profitability, the high cost of recruiting packages has weighed on margins. In the past two years, the wirehouses pulled back recruiting budgets to protect margins, trimming bonuses that skyrocketed in recent years.”

Cerulli’s report, U.S. Broker/Dealer Marketplace 2017: Segments of Strength, provides market sizing and competitive analysis of B/D channels, including wirehouses, national and regional B/Ds, IBDs, insurance B/Ds, and retail bank B/Ds. This report extensively covers recruiting and transition trends, including advisor movement sizing, advisor channel preferences, advisor retention, and transition metrics.

Principal Financial to join Washington State ‘Retirement Marketplace’

Posted on April 26, 2018 by Editorial Staff -

Principal Financial has become the first major retirement plan provider to offer services on Washington State’s online Retirement Marketplace, where individuals or employers in that state can find personal or workplace retirement savings plan vendors.

“Principal has been verified by the Washington Department of Financial Institutions to list plans on the Retirement Marketplace,” Carolyn McKinnon, the Marketplace Director, told RIJ. “Now they are going through an on-boarding process. We’ve learned that that takes time. A dozen other firms have entered but not completed the verification process, she said, adding that, to be verified, firms must agree to charge no more than 100 basis points per person, all-in, for administrative, investment and support services.

In an email to RIJ, a spokesperson for Principal said this week:

“Principal supports Washington’s public-private partnership approach to increase access to retirement savings plans for businesses and individuals. We are currently finalizing our participation plans and look forward to formally announcing when appropriate.”

Based in Des Moines, Principal Financial had about $655 billion under management in 2017. The company is a leading provider of 401(k) and 403(b) plans. It also administers defined benefit retirement plans, Employee Stock Ownership Plans, deferred compensation plans and pension risk transfer services.

Providers already on the Marketplace include Finhabits, which offers a Roth IRA and a Traditional IRA, and Saturna Trust Company, which offers a solo 401(k) for people who are self-employed.

Washington is one of about a dozen states that have started or taken steps to create either a statewide mandatory auto-enrolled IRA for workers at companies without plans (California and Oregon), a marketplace where individuals can find retirement savings plan providers, or a state-sponsored multi-employer plan (open MEP).

According to the website, the Washington Department of Commerce established its Small Business Retirement Marketplace in 2017 with legislation, RCW Chapter 43.330.730-750. The state Department of Financial Institutions and/or the Office of the Insurance Commissioner verify that all plans offered on the Marketplace meet the requirements set forth in RCW 43.330.732(7) and 735(6)(a). Enrollment in plans on the Retirement Marketplace is voluntary. Private financial services firms manage enrollment in the plans.

Insurers should be wary of sharp rate hike: A.M. Best

Posted on April 26, 2018 by Editorial Staff -

A slow, smooth increase in interest rates by the U.S. Federal Reserve would allow life insurers/annuity insurers—especially those with minimal surrender protection or unattractive living benefits—to adjust crediting rates on existing products, reshape portfolio durations and help maintain credit quality for an optimal return, says a new A.M. Best special report.

But a sharp rise in increase rates could pose challenges to both sides of the balance sheet, the rating agency’s analysts added.

The Best’s Special Report, “Abrupt Interest Rate Hikes Could Pose Challenges to Life Insurers,” observes that the yield curve continues to flatten. The Fed’s recent rate hikes have lifted short-term interest rates but longer-term yields have been slower to respond.

For insurers with more spread-based liability profiles, that reduces the incentive to match durations and creates the potential for asset-liability management (ALM) mismatches.

In addition, insurers have lengthened their bond portfolios in pursuit of yield. Bonds with longer durations are more sensitive to changes in interest rates, so upside interest rate shocks could lead to a jump in market value losses on asset sales as lapses increase. (Allocations to bonds maturing in less than five years are at their lowest point in nearly two decades.)

A rapid rise in rates also could tempt owners of spread-based products to switch to competing products, such as bank certificates of deposit, that offer higher returns based on current rates.

The resulting increase in surrenders could force insurers to realize losses on their corresponding bond portfolios, thus weakening their liquidity and financial profiles. Insurers with minimal surrender protection or unattractive living benefits would be most affected.

Life/annuity insurers with well-established and effective ALM programs are best equipped to navigate a rapidly rising interest rate environment after a prolonged period of low rates. The use of sophisticated enterprise risk management techniques can enhance life insurers’ ability to monitor asset-liability positions through cash flow analysis, duration, convexity, earnings and capital at risk.

Interest rate moves are difficult to predict, and disintermediation risk, increases in hedging costs and capital strain due to reversal of unrealized gains potentially could lead to rating concerns. A.M. Best believes insurers will have to carefully navigate the environment over the next few years, regardless of the direction interest rates follow.

MassMutual to publish commentary for DB plan sponsors

Posted on April 26, 2018 by Editorial Staff -

As part of a strategy to increase support for employers that sponsor defined benefit pension (DB) plans, Massachusetts Mutual Life Insurance Co. (MassMutual) is introducing a new quarterly market update and commentary about economic and regulatory conditions and their impact on managing pension obligations.

MassMutual’s Defined Benefit Market Update and Commentary is designed to support its DB plan sponsors and potential clients in the ongoing management of their plans. The quarterly report includes data on interest rates, bond and equity markets, and commentary on economic and regulatory matters to help sponsors make informed decisions.

The tracking report is being generated by MassMutual’s Defined Benefit actuarial and investment consultants with the goal of helping sponsors maintain an integrated actuarial and investment policy to manage their plan. MassMutual’s pension consultants then help plan sponsors to review the data and examine implications on individual plans.

The Update and Commentary is designed to be a quarterly snapshot of the economic environment and its implications for pension plans:

Providing updates of recent market returns and trends, movements in interest rates and the impact on pension funding rates and accounting discount rates;
Assessing the potential impact of the economy on pensions, including active, closed or frozen, and the impact of volatility on asset returns;
Reviewing specific plan’s current asset allocations in collaboration with the plan’s actuarial and investment consultants with the goal of reducing volatility on funding status;
Reporting recent movements in the pension accounting discount curve for both MassMutual’s own yield curve as well as the Citigroup Pension Discount Curve for sample pension plans; and
Tracking interest rate trends.

AXA Equitable Holdings to go public

Posted on April 26, 2018 by Editorial Staff -

AXA Equitable Holdings, Inc. announced today the launch of its initial public offering and commencement of the roadshow for the IPO. The company’s sole stockholder, AXA S.A., is offering 137,250,000 shares of common stock, and AXA has granted the underwriters a 30-day option to purchase up to an additional 20,587,500 shares of common stock.

AXA is selling all of the shares of common stock, and the Company will not receive any proceeds from the IPO. The IPO price is currently expected to be between $24.00 and $27.00 per share. The shares are expected to trade on the New York Stock Exchange under the ticker symbol “EQH”.

The shares are being offered by a group of underwriters led by Morgan Stanley & Co. LLC, J.P. Morgan, Barclays and Citigroup. A registration statement relating to the proposed IPO has been filed with the U.S. Securities and Exchange Commission but has not yet become effective.

AXA Equitable Holdings has approximately 12,200 employees and more than $670 billion of assets under management through two principal franchises, AXA Equitable Life and AllianceBernstein.

High-level hirings at AXA, Jackson, John Hancock and Lincoln

Posted on April 19, 2018 by Editorial Staff -

AXA has hired Aaron Sarfatti as managing director and head of strategy for its Life, Retirement and Wealth Management businesses. A credentialed actuary, Sarfatti will report to Brian Winikoff, Senior Executive Director and Head of Life, Retirement and Wealth Management.

Sarfatti has 15 years of experience in financial services, life insurance, asset management and retail banking. He most recently served as a partner with global management consulting firm, Oliver Wyman, in its North American Insurance Practice.

He recently played a key role in the NAIC initiative to reform its variable annuity reserve and capital regulations. Sarfatti received a Bachelor of Science in engineering degree in computer science from Princeton University where he also received certificates of proficiency in Finance and Public and International Affairs.

Jackson National Life Insurance Company appointed Scott Romine as president of Advisory Solutions for Jackson National Life Distributors LLC (JNLD), the marketing and distribution arm of Jackson. Based in the company’s Franklin, Tennessee office, Romine is responsible for building Jackson’s advisory business across the country.

Romine returns to JNLD after serving as the president and chief executive officer of National Planning Holdings, Inc., Jackson’s affiliated independent broker-dealer network that was sold to LPL Financial (LPL) in August 2017.

Prior to leading NPH, he held various sales leadership positions at JNLD since joining the firm in 1997, most recently serving as president from January 2015 – July 2016. Romine began his career in financial services as a retail investment advisor at Dean Witter Reynolds and holds FINRA Series 7, 24, 63 and 66 registrations.

Romine now oversees several departments that educate financial professionals and support the company’s strategic advisory initiatives, including the National Sales Desk, National Accounts, Advisory Sales Strategy, Advisory Resource Group, and Trust/RIA teams.

The company also recently named Greg Masucci as senior vice president of National Accounts for JNLD. Masucci will oversee the National Accounts team, which serves as the liaison for the firm’s distribution partners. He joins JNLD from J.P. Morgan Asset Management, where he most recently served as executive director, Global Strategic Relationships.

He held various roles during his tenure there, including leadership of the National Accounts teams for both the Wealth Management and Institutional Advisor channels. Prior to joining J.P. Morgan in 2011, Greg held various distribution and sales management roles at Genworth Financial and Merrill Lynch.

Tim Munsie also joined Romine’s team. Munsie recently joined JNLD as senior vice president of the Advisory Resource Group. He comes to JNLD from NPH, where he oversaw the broker-dealer network’s advisory and platform strategy. His group serves as a conduit between JNLD’s products and third-party fintech providers and platforms, particularly those related to the firm’s advisory initiatives.

During the last two years, Jackson has launched several fee-based versions of its annuity products. These strategies are designed to ensure advisors and the consumers they serve have access to numerous quality options as they work together to develop a comprehensive financial plan.

To support these product launches, JNLD recently formed a team of Regional Advisory Consultants (RACs), responsible for driving Jackson’s advisory business with fee-based advisors who haven’t historically utilized insurance products. The RACs work with contacts across the country by leveraging a hybrid approach of virtual wholesaling and traditional field travel to enhance advisory sales efforts.

Patrick Murphy has been named Chief Executive Officer, John Hancock Retirement Plan Services (JHRPS). He is based in Boston and is JHRPS’ president, will replace Peter Gordon, who will be retiring. Murphy will be responsible for leading all facets of the firm’s US retirement record keeping business. His appointment is effective immediately.

Murphy joined Hancock, the U.S. division of Toronto-based Manulife, when the company acquired New York Life’s RPS business, where he had been CEO. The transaction increased Hancock’s RPS assets under administration by about 60%, sped its expansion into the mid-case to large-case private sector retirement plan markets, and added scale and expertise.

Murphy had been at New York Life for 11 years in a variety of roles. He previously worked at American Express Retirement Plan Services, Transamerica and Putnam Investments. Murphy graduated from Brown University with a B.A. in Organizational Behavior and Management.

Lincoln Financial Group has named Chris Neczypor as senior vice president, head of Investment Risk and Strategy. He reports directly to Ellen Cooper, executive vice president and chief investment officer for Lincoln Financial.

Neczypor will be responsible for setting, implementing and providing oversight of the General Account’s investment risk and strategy, including quantitative portfolio construction and strategic asset allocation.

Prior to joining Lincoln Financial, Neczypor held senior investing and portfolio management positions at Kingdon Capital and Emrys Partners. Earlier in his career, he worked at PricewaterhouseCoopers and then Goldman Sachs, where he was the senior sell-side analyst covering the insurance sector and later the banking industry.

Neczypor has a B.S. in finance and accounting from Lehigh University. He is a Certified Public Accountant and holds his Series 7, 63, 86 and 87 designations.

LIMRA Ponders the Annuity Puzzle

Posted on April 19, 2018 by Kerry Pechter -

At the LIMRA-SoA Retirement Conference in Chicago last week, actuary Doug French of Ernst & Young revealed the secret sadness of the affluent retired professional who doesn’t have sleep-easy annuity income or longevity insurance to bolster his or her Social Security and pension.

“They spend all their time looking for pockets of income to spend,” he said. If they can’t find gains to harvest, they’re miserable. They’ve joined the ranks of the worried wealthy. “That results in a not-so-fun retirement,” French told a not-so-numerous general session audience at LIMRA’s signature retirement event.

Doug French (left) and Todd Giesing

The small crowd was no surprise, given the dismal state of domestic income annuity sales. French joined LIMRA research director Todd Giesing on stage for a tag-team slide presentation entitled, “Annuities: Are We Swinging and Missing on Guaranteed Lifetime Income?” The answer was yes.

While sales of accumulation-oriented annuity products had grown to $101.2 billion in 2017 from $59.0 billion in 2011, combined sales of “income later” products (variable and fixed indexed with living benefits and deferred income annuities) fell 45%, to $65.9 billion in 2017 from $120 billion in 2011. (Immediate annuities saw a modest increase, to $8.3 billion in 2017 from $7.6 billion in 2011.)

The next question was: Why did such a steep drop in sales occur, especially when Boomers are entering retirement at the rate of more than 10,000 people a day? As in an Agatha Christie play, there are plenty of plausible suspects, along with a few suspicious-looking maids, butlers and gardeners.

“If you look at the headwinds,” said French, you’ll see a nine-year bull market in equities (which has lulled people into a state of risk-acceptance), the long low interest rate period (which feeds the bull market), and the declining richness of living benefit riders in variable annuities, which no longer offer the 10%-of-premium payouts after a 10-year deferral period that they once did.

The enforced use of target-volatility funds in income-oriented VAs has undermined the living benefit, he said (which was surprising, since de-risking the funds should have allowed better living benefits). “The advisors say, ‘Give us back unlimited investment options, but the actuaries will say no to that,” he added. The Obama Department of Labor’s fiduciary rule was also cited as a headwind, since (as currently written) it allows only fiduciaries or those who accept fiduciary status to sell FIAs or VAs to IRA clients.

It was noted that financial advisors, who are the bouncers at the gate of the exclusive high net worth club, are rarely annuity lovers. When clients have $2 million or more, their advisors tell them to self-insure, French said.

At the other end of the affluent spectrum, clients with $250,000 to $500,000 “need an annuity or an advisor but not both,” he added. French also noted that advisor think annuities are hard to process; they complain that “annuities don’t fit on my work station” or integrate with their other software.

Advisors are also still angry that VA issuers de-risked in-force contracts after the financial crisis, sometimes by hiking fees as their own hedging and reserve costs went up. “Many advisors feel betrayed by the issuers and they will never forget that betrayal,” French said.

The declining supply of VAs is also to blame for falling sales, as Nick Carbo of Oliver Wyman pointed out in one of the conference break-out sessions. Four companies that dominated VA production and sales in 2008–MetLife, John Hancock, Hartford and ING–are out of the VA business. Meanwhile, Prudential has purposely reduced VA sales by more than 40% over the past 10 years, AXA has switched its focus to selling accumulation-oriented “buffered” indexed annuities.

The 2017 VA sales leader, Jackson National, still sells a lot of Perspective II contracts with income riders, but it has introduced investment-only VAs and, recently, a new FIA. VAs with GLWBs, which have equity-linked risk as well as equity-linked returns, simply demand too much capital that could be applied to other business lines.

What’s the solution to the sales drought?

Like French, Carbo blamed the drop in client election of living benefits on VAs to “less attractive” riders. He attributed the drop in the election of living benefits on FIAs to the increase in FIA sales in the bank channel, where the FIA is sold as an alternative to low-yielding certificates of deposit rather than as a source of guaranteed income. He noted, however, that the GLWB on a typical FIA after a 10-year deferral period now pays out more per year than life-only DIA with a 10-year deferral.

How do we not strike out with guaranteed income? French suggested, to no small surprise, that annuity product design should be standardized to reduce client and advisor confusion, that more advisor “toolkits” should include annuities, and advisors should be taught to use annuities for “risk rearrangement” in client portfolios.

“We can stick with business as usual, which means staying complicated and kicking the can down the road for another five years,” he said. “Or, we can work with regulators to remove some of the hurdles to selling annuities, with common licensing, standardized products and streamlined compliance. We should also embrace the principle of ‘Know Your Customer.’ Advisors need to understand their clients’ health and likely longevity.”

A close follower of the annuity industry might observe a few structural reasons why income annuities aren’t selling well.

First, every American already has an inflation-protected life annuity with a 100% spousal survivor benefit called Social Security. For all but the wealthiest Americans, Social Security represents half or more of their retirement income. A retired boomer couple with two strong earnings histories might receive a combined $60,000 at age 70.

Second, everyone who has a sizeable 401(k) or IRA balance needs to take required minimum distributions at age 70½. RMDs are a form of forced annuitization; they are a reminder from the government that tax deferred savings is supposed to provide lifetime income, not bequests. Third, tens of millions of boomers are likely to regard their home equity (and perhaps a reverse mortgage) as a substitute for longevity insurance or long-term care, if they need it.

Indeed, selling income annuities may be difficult for a somewhat obvious reason: Americans have no history, tradition or memory of buying annuities near retirement with large lump sums of their own money. They do have a history of accumulating pensions incrementally over their lifetimes through their places of employment. Defined contribution/defined benefit hybrids are gaining traction abroad, and they may eventually emerge as the best avenue of progress for those who want to spark more interest in lifetime income products in the US.

Retirement Wonks and Honky-Tonks

Posted on April 19, 2018 by Kerry Pechter -

The virtue and the defect of the US retirement savings industry is that the nation’s 700,000 small, medium and large plan sponsors can choose their own advisors, recordkeepers, fiduciaries, third-party administrators, software vendors, investment managers, pension attorneys and financial wellness coaches.

The diversity of service providers gives employers countless options to choose from, while competition keeps prices down and sparks innovation. That’s the industry’s virtue. But the multiplicity of choices can be so bewildering that (despite the hefty tax advantages for business owners) many employers don’t sponsor plans at all, leaving as many as half of US workers with no savings plan except Social Security.

Together, all those varied advisors and vendors comprise a vast and motley crowd, ranging in attire from jeans and khakis to pin-stripes, and an estimated 2,200 of them (half advisors) tumbled into Nashville, Tennessee’s guitar-themed Music City Center last weekend for the largest-ever meeting of the National Association of Plan Advisors (NAPA) and its umbrella organization, the American Retirement Association (ARA).

Brian Graff

The ARA is the voice of the small- and mid-sized plan industry. Its CEO and chief lobbyist is Brian Graff, an Ivy League lawyer who likes to say he “has friends in low places”—meaning Washington, DC—and who sometimes recalls watching, at age 11, as his schoolteacher parents bought a 403(b) plan across their kitchen table.

Graff has been busy defending his industry from what it sees as adverse legislation and regulation. In late 2017, he and other 401(k) advocates spent much of late 2017 successfully prevented Congress from reducing the tax deductibility of retirement plan contributions; some in Congress hoped to use the resulting revenue to finance corporate tax cuts.

‘Divine misunderstanding’

One official told him, he told NAPA members, that ‘Rothification’ alone—i.e., the taxation of all or some 401(k) contributions as ordinary income—could allow Congress to cut corporate tax rates by three percentage points. Last November’s surprising election result and the Republican tax cuts had left him with “a doozey of a hangover,” Graff said.

At NAPA’s party at the Wildhorse Saloon

A “divine misunderstanding” helped stave off the raid on 401(k) contributions, he told his Nashville audience. After Good Morning America telecasters misreported that the Congress planned to cap 401(k) contributions at $2,400 (the proposal would have capped deductible contributions at $2,400), President Trump quickly tweeted that there would be no changes to 401(k) plans. “That’s the only one of the president’s tweets that I ever liked,” Graff said.

Graff and others in the retirement industry took a loss in March when legislation that they supported, Sen. Orrin Hatch’s Retirement Enhancement and Savings Act (RESA), failed to become incorporated into the massive bipartisan $1.2 trillion omnibus spending bill that prevented a government shutdown.

RESA would have made it much easier to start so-called open multiple-employer plans (MEPs). That change would have allowed financial services companies to sponsor full-service 401(k) plans that small plans could easily join. It would have enabled the larger providers to bring economies of scale to the small plan market, make that market profitable for them and in theory, expand the availability of retirement savings plans to more small-firm workers. In other words, it would help close the “coverage gap.”

“Senate Democrats and Republicans wanted to do RESA,” Graff told RIJ this week, “But House Republicans wanted improvements in health savings accounts in exchange for Republican Senators’ support for RESA and they didn’t get it.” So they left RESA out of the spending bill. The disagreement wasn’t about the substance of the measures, Graff said.

Whither the fiduciary rule?

JPMorgan’s conference booth

ARA is currently monitoring the after-effects of the Fifth Circuit Court of Appeals’ recent 2-to-1 decision to nullify the Department of Labor’s fiduciary rule. At the Nashville conference, Graff discussed the ramifications of the decision with attorneys David Levine of Groom Law Group and Tom Clark of Wagner Law Group.

Everyone seems to be waiting to see how the Trump DOL will respond to the ruling. (Preston Rutledge, who wrote RESA while working for Sen. Hatch, is the new head of DOL’s Employee Benefit Security Administration. He was scheduled to speak in Nashville but canceled due to the sensitivity of the ongoing litigation.)

The Fifth Circuit ruling takes effect May 7. If the DOL wants to appeal the decision, it has until April 30 to request a re-hearing of the matter by all of the Fifth Circuit judges, not just a three-judge panel, Clark said. Alternately, the DOL has until May 13 to appeal the decision to the U.S. Supreme Court. (The Trump DOL’s reason to appeal: Displeasure with the way the Fifth Circuit ruling could curtail its authority.)

At State Street Global Advisor’s booth

The DOL may let the decision stand and not respond, he added. In that case, the DOL would simply continue its current policy of not enforcing the Obama version of the rule while preparing to replace it with something more aligned with the Trump administration’s business-friendly stance. Or the DOL could simply let the rule die and not replace it with anything.

That would leave a “void,” Clark said. Levine added, “It leaves us in a bit of a morass.” The fiduciary rule got rid of the so-called five-part test for determining whether an intermediary (investment advisor, registered rep or insurance agent) is a fiduciary—which would determine whether he or she could sell products on commission to retirement plan participants or IRA owners.

“The [definition of a fiduciary] was clearer under the fiduciary rule,” said Clark, who spoke carefully lest he antagonize the largely anti-fiduciary rule audience. “This is the only situation where things might be more painful than if we had just kept the rule. It’s better to have one fiduciary rule than to have 20 different opinions” issued by, for instance, the DOL, the Securities & Exchange Commission and the individual state insurance commissions.

At ‘Women in Retirement’ booth

Graff saw another benefit to the existing rule: It showed plan advisors and participant call-center operators what they could say to educate plan participants about IRA rollovers without crossing the line into soliciting business for themselves or their firms. “Before the rule this was a question mark,” Graff said. “I’m concerned that we might be headed back to that world.”

The next big legislative issue for the retirement plan industry will be the shortfall in plan coverage. The controversy over Rothification demonstrated to legislators that 401(k)s are a hot-button issue for voters, Graff said. It also alerted them to the fact that only about half of Americans workers are enrolled in a workplace savings plan at any given time.

“The coverage gap is the next big issue,” he said at the conference. “The math is adding up to government doing something about it.” As a lobbyist, his job will be to steer state and federal legislators to rely on the private sector for specific solutions, and to steer them away from state or federal “public option” solutions that might crowd out private service providers.

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.

Principal in financial wellness deal

Lincoln Financial completes acquisition

Data Connection

Lists*