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Jackson National reports record pre-tax operating income during 2017

Posted on March 16, 2018 by Editorial Staff -

Jackson National Life Insurance Company generated $2.9 billion in IFRS (International Financial Reporting Standards) pre-tax operating income during 2017, an increase of three percent over 2016 and the highest in company history, the company said in a release this week.

An indirect wholly owned subsidiary of Britain’s Prudential plc, Jackson recorded sales and deposits of $21.4 billion in 2017. “The results mark another highly successful year for the company, despite recent challenges faced throughout the industry,” the release said.

Barry Stowe, chairman and CEO of the North American Business Unit of Prudential plc4, said positive net flows and the growth of separate account assets under management drove the results, which totaled a record $176.6 billion in 2017.

Stowe said Jackson wants to “embrace our leadership position in the industry” and “establish the footprint to change the narrative in the retirement marketplace… We are working harder than ever to ensure consumers understand the value of annuities that offer a lifetime income stream.”

Jackson increased total IFRS assets to $264.4 billion at the end of 2017, up 12% from year-end 2016. Jackson also reported regulatory adjusted capital of $4.3 billion, more than eight times the minimum regulatory requirement (as of December 31, 2017), while remitting a $600 million dividend to its parent company.

According to the release, Jackson’s net income was impacted by hedging losses incurred due to the equity market, which were not fully offset by the release of accounting reserves. “IFRS accounting for variable annuity liabilities is not necessarily consistent with the economic value of these liabilities,” the release said. “Jackson continues to manage its hedge program on an economic basis and is willing to accept the accounting volatility that results.” The company also said it has $250.0 billion of IFRS policy liabilities set aside to pay future policyowner benefits (as of December 31, 2017).

Convert deferred annuities into long-term care coverage: OneAmerica

Posted on March 16, 2018 by Editorial Staff -

Owners of deferred annuities may be overlooking an opportunity to apply their annuity assets to long-term care expenses, a release from OneAmerica said this week.

About 18% of U.S. households own a deferred annuity, but not many annuity owners are expected to convert them to monthly income, according to estimates by the LIMRA Secure Retirement Institute.

“Americans have nearly $3 trillion in assets in fixed and variable annuities,” said Chris Coudret, vice president and chief distribution officer at OneAmerica, an Indianapolis-based financial services firm.

OneAmerica suggests that those who don’t plan to use their deferred annuity contracts for lifetime income should consider using a 1035 exchange to transfer their annuity assets to a hybrid annuity with a long-term care rider. That may be more efficient than letting the annuity assets pass to a beneficiary through a taxable death benefit.

The American Association for Long-Term Care Insurance has published a “Guide to Long-Term Care Planning Using 1035 Exchanges” that shows annuity owners how to use money from their contracts to pay long-term care expenses without incurring income taxes on the withdrawals.

The Pension Protection Act of 2006, the guide says, enables income tax-free withdrawals from specific annuity contracts that pay for qualifying LTC expenses or LTC insurance premiums. These include fixed interest annuities with LTC benefits, which OneAmerica offers.

These hybrid annuities provide tax deferral and non-LTC liquidity, while offering a guaranteed payout benefit and the option for lifetime LTC benefits. Policyholders who die before exhausting their LTC benefits can pass the difference to a beneficiary. Contracts can be purchased for a single person or shared between two people.

Patterson promoted at Principal Financial

Posted on March 16, 2018 by Editorial Staff -

Principal Financial Group announced this week that Jerry Patterson, a senior vice president for Retirement and Income Solutions (RIS), will assume leadership of the company’s full service retirement and individual investor businesses, effective early second quarter.

Patterson currently has responsibility over individual investor, retail annuity, bank and full service payout. He will continue to report to RIS president Nora Everett. Patterson succeeds Greg Burrows, who is retiring on July 31.

Prior to joining Principal in 2001, Patterson worked for a number of financial and insurance companies in management and marketing roles. He was first hired by Principal as chief marketing officer for the Life and Health businesses and spent time in New York as the chief operating officer of Nippon, Life Benefits, before assuming his current role in 2012. An internal and external search is underway to find his successor for the retail annuity, bank and full service payout businesses, Principal said.

Allianz Life Accumulation Advantage Fixed Indexed Annuity

Posted on March 8, 2018 by Editorial Staff -

Source: Allianz Life of North America

Allianz Life’s New FIA Aims for Accumulation

Posted on March 8, 2018 by Kerry Pechter -

Allianz SE has dominated the fixed indexed annuity (FIA) category ever since it bought Robert W. MacDonald’s LifeUSA FIA sales juggernaut for $540 million back in 1999. So the folks at Allianz Life of North America, the German company’s US arm, keep a close eye on subtle changes in the FIA market.

Last year, the Minneapolis-based insurer noticed a subtle inflection in demand away from income-oriented contracts toward accumulation-oriented contracts. In response, the company introduced its first accumulation-only FIA contract in some time.

The new contract, called the Allianz Accumulation Advantage Annuity, was announced this week. It has neither an embedded nor even an optional guaranteed lifetime income benefit (GLIB). Instead, it introduces a new volatility-controlled, balanced index option from BlackRock. The option, exclusive to Allianz Life and available on the new product as well as the Allianz 222 and 360 FIAs, is called the BlackRock iBLD Claria Index.

“We’ve see a shift in the sales and in the use of FIAs over the last year to 18 months,” Matt Gray (below right), vice president of Product Innovation, Marketing, at Allianz Life, told RIJ this week. “There’s been more interest in pure accumulation products.

“That’s a function of the run-up in the stock market, despite recent volatility. There’s a desire among investors to lock in the gains they have while continuing to accumulate. There are also people who want to come off the sidelines [and get out of cash]. It’s both.

“Our focus has been on income, on helping people generate more income from FIAs [through living benefit riders]. This contract is focused on accumulation,” Gray said.

“As a result, it offers the most competitive rates of any of our products. All of our other FIA contracts have living benefits. The living benefit is optional on only one product, the 365i. On all of the others, the rider is embedded,” he said.

Counter-intuitively, the addition of the BlackRock Index, which contains stocks, bonds and cash, provides a choice that can dampen a client’s index-linked returns, relative to the returns from buying options on a pure equity benchmark like the S&P500 Index. When an index is less volatile, Allianz Life can afford to set the caps on its crediting rates higher for clients using that index. It’s simply a different allocation of the product’s risk budget.

(Fixed indexed annuities are structured products where typically up to 95% of the premium goes toward the purchase of long-duration bonds, zero-coupon bonds or into the insurer’s general fund. This part of the product supports its no-loss guarantee. The remaining 5% of premium goes toward the purchase of options on an equity index. If the index goes up, the options grow in value. The client gets a portion of any gain in the index.)

“The BlackRock index is the first index inside an FIA where the asset manager, on an annual basis, can adjust the weighting of the equity and bond components,” Gray said. “On other indices, the index is set for the term of the contract. [There’s a certain appeal to set-it-and-forget-it, but with a partner like BlackRock, which has so much asset management experience, it’s worth letting their managers exercise some discretion once per year.]

To the frequent frustration of advisors, finding an FIA contract with both a generous crediting rate and a generous income rider has been difficult if not impossible ever since the financial crisis. (The same is true for finding a variable annuity with a rich equity allocation and a generous income rider.)

When issuers want to beef up a living benefit, and accept more risk exposure in that area, they are likely to reduce risk exposure on the asset side. In the case of FIAs, that means reducing the caps, spreads, or participation rates.

“By using the volatility controlled indices, we’re able to offer a higher cap. So there’s more upside potential. In such a low-rate environment, those higher caps, or spreads with no caps in some cases, have been well-received.” The cap on the S&P500 Index is 5%, but the cap on the new BlackRock Index is 6%, and it’s 6.25% on the Bloomberg index.

If you prefer to have no cap, the participation rate is 75% for all three indices.”

In addition to adding the Claria Index, Allianz Life is using two other ways to boost the crediting rate limits. It has limited free annual withdrawals from the contract to 5% per year during the surrender period; FIAs typically allow 10% annual withdrawals without a surrender charge. It has also added a market-value adjustment (MVA), which penalizes contract owners for taking excess withdrawals when interest rates rise.

The Accumulation Advantage contract, which pays a 6% upfront commission, will be distributed through insurance marketing organizations (IMOs) or field marketing organizations (FMOs) to broker-dealers (b/ds).

“This is being offered to our FMO-IMO channel and they work with the broker-dealers,” Gray told RIJ. We really tried to build this product to leverage those relationships. FIAs are still newer in the direct b/d space, but the b/d space makes up a huge percentage of our sales. A registered rep is now involved in 70% of our sales.

“In other words, the producer or agent is securities-licensed in 70% of the transactions. We’ve seen a big shift over the last five or ten years [from the days when independent insurance agents sold 90% of FIAs]. Allianz Life’s FMO-IMO channel is called the Allianz Distribution Group. In 30% to 40% of our FMO-IMO business, we have an ownership stake in the distribution.”

Gray offered his own interpretation of the drop in overall annuity sales in 2017 that came amid a run-up in equities and in the wake of the fiduciary rule, which is now on hold but made selling indexed annuities more cumbersome.

“There was definitely a dip in sales in 2017, and it snapped a long growth streak,” he said. “I think that’s temporary. With the significant ramp-up in the equity markets, people seemed to forget that you could lose money. But the recent volatility might actually help this category.”

As for the impact of uncertainty over the DOL fiduciary rule on sales, he said: “To the extent that companies have been focusing on preparing for that instead of launching new products, there was a definite impact from the DOL. That took the distributors’ attention away for awhile.”

Gray said it’s too soon to say whether demand for the new Accumulation Advantage product will come mainly from people who want to lock in gains or those who want to come off the sidelines.

“We’ll find out soon where the money is coming from,” he told RIJ. “But the hypothesis from the field force is that, as people get closer to retirement, and have less ability to stomach another big drop in the market, the idea of having no downside but the potential for growth becomes very attractive.”

Behavior risk is rising for FIA living benefit issuers: Ruark

Posted on March 8, 2018 by Editorial Staff -

Surrender rates among fixed indexed annuity (FIA) contract owners have “exhibited a secular downward trend since 2007,” according to Ruark Consulting’s most recent studies of FIA policyholder behavior. The studies covered products with and without a guaranteed living income benefit (GLIB).

“Surrenders at the ‘shock’ duration (the year after the end of surrender charge period) fell from over 50% in 2007 to 15-25% in recent quarters, and surrender rates during the surrender charge period have fallen from high single digits to below 3%,” the Simsbury, Conn.-based actuarial firm reported in a release this week.

As a result, the amount of client assets protected by a GLIB outside the surrender charge period—a measure of the rising behavioral risk exposure for FIA issuers—increased 82% in the 2018 edition of Ruark’s studies over the 2017 edition, the release said.

The studies, which examined the drivers of surrender behavior and income utilization, were based on the behavior of 3.3 million policyholders from January 2007 to September 2017. Sixteen FIA writers participated, comprising $215 billion in account value as of September 2017.

“Getting actuarial assumptions right can mean the difference between profitability and anti-selection, or between overhedging and underhedging,” said Timothy Paris, Ruark’s CEO, in a statement. Ruark’s studies use industry-wide rather than single-company data to identify overall trends.

Study highlights include:

Uncertainty over the DOL’s proposed Fiduciary Rule and political factors may have encouraged a “wait-and-see” attitude among many policyholders and advisors, causing the industry-wide dip in surrenders seen in 2016 and the rebound seen in 2017.
Contracts with a living benefit rider show much greater persistency than those without. Surrender rates during the surrender charge period for contracts with GLIBs are less than half those of contracts without. Among owners who have begun taking income withdrawals, persistency is even greater; shock duration rates are about 15%, versus 26% for contracts without GLIB.
Low credited rates tend to stimulate surrenders. As past studies showed, contracts earning less than 2% exhibit sharply higher surrenders than those earning more. Additional experience in this study reveals differentiation among contracts with higher returns, as well.
The in-the-money effect, by which owners have higher persistency when the account value is below the guarantee base, is subtle in the case of FIAs. We find that using an actuarial moneyness basis, which discounts guaranteed income for interest and mortality rates, has much greater predictive power than a nominal measure.
GLIB benefit commencement rates are low: 7% overall in the first contract yearand then falling to the 2% range in years 3-10. Exercise rates spike in year 11, suggesting that benefit bonuses may be effective at delaying exercise, although experience is limited.
Once the owner of a GLIB contract begins taking withdrawals, he or she is very likely to continue in subsequent years; average continuation rates are near 100%. But utilization of the benefit is far from fully efficient: A significant proportion of contract owners withdraw income in excess of the contractual guarantee, which degrades value of the guarantee in future years.
GLIB commencement rates vary considerably by age and contract size. They are also influenced by the in-the-money effect. Exercise rates increase sharply when contracts move deep in the money, as policyholders recognize the economic value of the income guarantee.
FIA contracts typically offer the opportunity to take 10% of account value annually in penalty-free withdrawals, often following a one-year waiting period. This is the true for contracts with and without a GLIB rider. Base contract withdrawals have been largely stable over the past decade. Behavior differs slightly across four groups: Those taking the full penalty-free amount; those taking less; those taking excess; and those for which no penalty-free amount applies.
Free partial withdrawal activity on the base contract is influenced by age and required minimum distributions, as well as contract size. Notably, withdrawal sizes spike in the year following the end of the surrender charge period, when all partial withdrawals become penalty-free. Average withdrawal sizes jump eight percentage points following the end of the surrender charge period.

Detailed study results, including company-level analytics, are available for purchase by participating companies.

Ruark Consulting, LLC, based in Simsbury, CT, is an actuarial consulting firm specializing in principles-based insurance data analytics and risk management. Its industry- and company-level experience studies of the variable annuity and fixed indexed annuity markets have served as the industry benchmarks since 2007.

As a reinsurance broker, Ruark has placed and administers dozens of bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value, and also offers reinsurance audit and administration services.

The Real Engine of the Business Cycle

Posted on March 8, 2018 by Amir Sufi and Atif Mian -

Contractions should be viewed as at least partly the result of earlier economic excesses, write two economists. In other words, credit-supply expansions often sow the seeds of their own destruction.

Every major financial crisis leaves a unique footprint. Just as banking crises throughout the 19th and 20th centuries revealed the importance of financial-sector liquidity and lenders of last resort, the Great Depression underscored the necessity of counter-cyclical fiscal and monetary policies. And, more recently, the 2008 financial crisis and subsequent Great Recession revealed the key drivers of credit-driven business cycles.

Specifically, the Great Recession showed us that we can predict a slowdown in economic activity by looking at rising household debt. In the United States and across many other countries, changes in household debt-to-GDP ratios between 2002 and 2007 correlate strongly with increases in unemployment from 2007 to 2010. For example, before the crash, household debt had increased enormously in Arizona and Nevada, as well as in Ireland and Spain; and, after the crash, all four locales experienced particularly severe recessions.

In fact, rising household debt was predictive of economic slumps long before the Great Recession. In his 1994 presidential address to the European Economic Association, Mervyn King, then the chief economist at the Bank of England, showed that countries with the largest increases in household debt-to-income ratios from 1984 to 1988 suffered the largest shortfalls in real (inflation-adjusted) GDP growth from 1989 to 1992.

Likewise, in our own work with Emil Verner of Princeton University, we have shown that US states with larger household-debt increases from 1982 to 1989 experienced larger increases in unemployment and more severe declines in real GDP growth from 1989 to 1992. In another study with Verner, we examined data from 30 countries over the past 40 years, and showed that rising household debt-to-GDP ratios have systematically resulted in slower GDP growth and higher unemployment. Recent research by the International Monetary Fund, which used an even larger sample, confirms this result.

All told, the conclusion that we draw from a large body of research into the links between household debt, the housing market, and business cycles is that expansions in credit supply, operating primarily through household demand, are an important driver of business cycles generally. We call this the “credit-driven household demand channel.” An expansion in the supply of credit occurs when lenders either increase the quantity of credit or decrease the interest rate on credit for reasons unrelated to borrowers’ income or productivity.

In a new study, we show that the credit-driven household demand channel rests on three main conceptual pillars. First, credit-supply expansions, rather than technology or permanent income shocks, are the key drivers of economic activity. This is a controversial idea. Most models attribute macroeconomic fluctuations to real factors such as productivity shocks. But we believe the financial sector itself plays an underappreciated role through its willingness to lend.

According to our second pillar, credit-supply expansions affect the real economy by boosting household demand, rather than the productive capacity of firms. Credit booms, after all, tend to be associated with rising inflation and increased employment in construction and retail, rather than in the tradable or export- oriented business sector. Over the past 40 years, credit-supply expansions appear to have largely financed household spending sprees, not productive investment by businesses.

Our third pillar explains why the contraction phase of the credit-driven business cycle is so severe. The main problem is that the economy has a hard time “adjusting” to the precipitous drop in spending by indebted households when credit dries up, usually during banking crises. Even when short-term interest rates fall to zero, savers cannot spend enough to make up for the shortfall in aggregate demand. And on the supply side, employment cannot easily migrate from the non-tradable to the tradable sector. On top of that, nominal rigidities, banking-sector disruptions, and legacy distortions tend to make post-credit-boom recessions more severe.

Our emphasis on both the expansionary and contractionary phases of the credit cycle accords with the perspective of earlier scholars. As the economists Charles P. Kindleberger and Hyman Minsky showed, financial crises and credit-supply contractions are not exogenous events hitting a stable economy. Rather, they should be viewed as at least partly the result of earlier economic excesses – namely, credit-supply expansions.

In short, credit-supply expansions often sow the seeds of their own destruction. To make sense of the bust, we must understand the boom, and particularly the behavioral biases and aggregate-demand externalities that play such a critical role in boom-bust credit cycles.

But that leaves another question: What sets off sudden credit-supply expansions in the first place? Based on our reading of historical episodes, we contend that a rapid influx of capital into the financial system often triggers an expansion in credit supply. This type of shock occurred most recently in tandem with rising income inequality in the US and higher rates of saving in many emerging markets (what former US Federal Reserve Chair Ben Bernanke described as the “global savings glut”).

Although we have focused on business cycles, we believe the credit-driven household demand channel could be helpful in answering longer-run questions, too. As the Federal Reserve Bank of San Francisco’s Òscar Jordà, Moritz Schularick, and Alan M. Taylor have shown, there has been a long-term secular increase in private – particularly household – credit-to-GDP ratios across advanced economies. And this trend has been accompanied by a related decline in long-term real interest rates, as well as increases in within-country inequality and across-country “savings gluts.” The question now is whether there is a connection between these longer-term trends and what we know about the frequency of business cycles.

Amir Sufi is professor of Economics and Public Policy at the University of Chicago Booth School of Business. Atif Mian is professor of Economics, Public Policy, and Finance at Princeton University and director of the Julis-Rabinowitz Center for Public Policy and Finance at the Woodrow Wilson School. They are co-authors of House of Debt (University of Chicago Press, 2014).

Babybust? Only 11.7% of financial advisors are under 35: Cerulli

Posted on March 8, 2018 by Editorial Staff -

The average financial advisor is 50 years old and only 11.7% of advisors are under age 35. In addition, 28% of advisors who are within 10 years of their own retirement are still unsure about their succession plan, according to new data from Cerulli Associates, the global research firm.

“The industry has been scrambling to find a proactive solution to this demographics problem,” said Marina Shtyrkov, a Cerulli research analyst in a release. “Advisors who are 55 years or older manage 36.9% of assets and comprise 39.2% of headcount.”

“Filling the pipeline with quality talent poses a challenge for broker/dealers (B/Ds) and independent firms. Advisors and B/Ds should consider how existing compensation models, work/life balance expectations, training support, mentoring, and company culture meet younger generations’ needs,” she added.

“As a critical succession cliff approaches and aging advisors begin retiring in greater numbers, younger advisors and candidates will increasingly wield stronger leverage. Firms will need to take their preferences into serious consideration because this next generation will ultimately shape the financial advice business,” the release said.

“Building and managing a team poses a challenge for advisors. The skillset needed to perform well as a financial advisor differs from the one needed to be a good leader and manager. Advisors who excel in their day-to-day work with investments or financial planning can struggle to groom junior advisors and hire quality staff. A lack of clear communication regarding expectations, goals, and a path for growth can derail junior advisor hiring attempts,” the release continued.

“Home offices need to provide advisors with extensive guidance and support for hiring and onboarding rookies,” added Kenton Shirk, director of Cerulli’s Intermediary practice. “A mis-hire could cause substantial disruption and distract a lead advisor from his or her core responsibilities. Advisors especially need help developing career paths to groom rookies over a period of time, and they need guidance on how to be an effective mentor.”

Cerulli’s latest report, U.S. Advisor Metrics 2017: The Next Generation of Planning, discusses advisors’ expansion of comprehensive financial planning offerings in response to competitive pressures, the consolidation among advisor practices, and a continued increase in succession awareness.

Ireland to adopt auto-enrollment, follow ‘roadmap’ to pension reform

Posted on March 8, 2018 by Editorial Staff -

Ireland plans to introduce an auto-enrollment system to boost pension saving as part of a major set of reforms laid out by the government this week, IPE.com reported.

Taoiseach Leo Varadkar, head of the Irish government, announced on Wednesday a five-year “roadmap for pensions reform” encompassing the state pension as well as both private sector and public sector provision.

Varadkar said the government wanted to “create a fairer and simpler contributory pension system where a person’s pension outcome reflects their social insurance contributions, and in parallel, create a new and necessary culture of personal retirement saving in Ireland.”

Ireland was “facing a number of challenges” from changing demographics and its impact on government finances and retirement security. In the next 40 years the ratio of working age people to pensioners is expected to fall from 4.5 to one to 2.3 to one, said Varadkar, a former minister for social protection.

The government’s announcement follows months of debate over pension policy. Lawmakers have lobbied for scrapping the mandatory retirement age and measures to stop employers abandoning underfunded defined benefit (DB) schemes.

The six “strands” of the reforms cover:

A “total contributions approach” to the state pension, including maintaining its value at 34-35% of average earnings;
Automatic enrollment, starting in 2022 to address Ireland’s “significant” pension savings gap;
Improvements to the sustainability of DB schemes and protections for members;
Changes to public sector pension rules;
The implementation of the IORP II directive
New flexibilities to allow people to work past their default retirement age

The government has been under pressure to improve pension protections after several high-profile problems with underfunded DB plans. More than a quarter (26%) of Irish DB plans failed to meet the required funding standard, the government found.

Two providers enter Germany’s new market for hybrid DB/DC plans

Posted on March 8, 2018 by Editorial Staff -

Two teams of pension providers entered products this week in the brand new market for workplace defined contribution plans that was created in Germany by pension laws that took effect in January, IPE.com reported. The hybrid plan designs are known as “defined ambition” or “target pension” plans.

Insurer R+V and Union Investment announced that they would use their Pensionsfonds design as a vehicle to offer defined contribution pension (DC) plans under the new law, called the Betriebsrentenstärktungsgeset, or BRSG).

Separately, a consortium of five insurers known as Das Rentenwerk (“Pension Factory”) has opted for a unit-linked insurance product known as Direktversicherung (“Direct Insurance”).

“We are ready to go with our product, which can be individualized for different industries,” said Rüdiger Bach, board member at R+V, whose Pensionsfond is a type of defined contribution plan allowed since 2001. “The Tarifparteien need to understand the new pension model, the framework and which adjustment options are available to them.”

The Rentenwerk consortium said its insurance-based product “offers more transparency” on costs and investments than a pensionsfond. But the insurers added they were “open to other product solutions” if the employer/employee panels demand it.

Employer and employee representatives (Tarifparteien) in various German industries are still discussing when to start negotiations on the new plans, which don’t offer the types of guarantees that defined benefit plans do.

Unionized workers typically have a strong voice in pension discussions in Europe, even as defined contribution plans replace defined benefit plans. In Germany, any new industry-based pension plan under the BRSG has to be jointly designed by the employer and employee industry representatives, who also have to have seats on the board of the entity implementing the plan.

Daniel Günnewig, board member on the R+V Pensionsfonds AG, a joint venture between R+V and Union Investment, said: “We will create investment committees in which employer and employee representatives will have a say in the strategic asset allocation, target pension levels and investments in general. The tactical asset allocation and everyday investment decisions will be in the hands of the fund manager.”

Both sets of providers said they are talking with some industries about how to implement the new products. The metal industry was one of the first to confirm negotiations on the new DC plans under the BRSG.

German insurers Talanx and Zurich have also said they would offer implementation of the new target pension plans via the Pensionsfonds vehicle. A consortium being formed by the two insurers, Die Betriebsrente, is due to go live by the end of June.

Honorable Mention

Posted on March 8, 2018 by Editorial Staff -

Debel to lead MetLife’s institutional retirement business

MetLife, Inc., has named Executive Vice President Marlene Debel as head of its Retirement & Income Solutions (RIS) business, effective immediately. She is responsible for MetLife’s structured risk and funding solutions for institutional retirement plans, including pension risk transfer, institutional income annuities and stable value funds.

Debel will remain U.S. CFO for MetLife until a successor is named. Previously she spent five years as MetLife’s treasurer, where she was responsible for capital management, liquidity risk, cash management and MetLife’s relationships with banks and ratings agencies.

Debel joined MetLife from Bank of America where she was head of Global Liquidity Risk Management. Prior to that, Debel was Assistant Treasurer of Merrill Lynch and Co.

Debel joined MetLife in 2011. She received an MBA in finance from Fordham University and a BS in finance from the State University of New York at Albany.

Funded status of S&P 1500 pensions rose 1% in February

The estimated aggregate funding status of pension plans sponsored by S&P 1500 companies rose one percent in February 2018 to 88% at the end of the month, according to a release from Mercer, the human resource consulting of Marsh & McLennan Companies.

The improvement resulted from “a significant increase in discount rates, which more than offset losses in the equity markets,” a Mercer release said. As of February 28, 2018, the pension fund’s estimated aggregate deficit of $262 billion had decreased by $29 billion, from $291 billion at the end of January.

The S&P 500 index fell 3.9% and the MSCI EAFE index fell 4.7% in February, the release said. Typical discount rates for pension plans as measured by the Mercer Yield Curve rose by 23 basis points to 3.97%.

“Volatility continued in February, and equities ended down by around 4% for the month, marking the first significant month-over-month decrease in over a year,” said Scott Jarboe, a partner in Mercer’s Wealth business.

“Aggregate funded status still saw some improvement due to an increase in discount rates by over 20 basis points. Clients are beginning to look carefully at plans in 2018, and we expect to see some evolution in the context of tax reform and market volatility.”

The estimated aggregate value of pension plan assets of the S&P 1500 companies as of January 31, 2018 was $1.99 trillion, compared with liabilities of $2.28 trillion. At the end of February, assets were $1.97 trillion USD, compared with liabilities of $2.23 trillion USD.

Each month, Mercer estimates the aggregate funded status position of plans sponsored by S&P 1500 companies. The estimates are based on each company’s latest available year-end statement and by projections to February 28, 2018 in line with financial indices. The estimates include US domestic qualified and non-qualified plans, along with all non-domestic plans.

After dip, global equities outdraw U.S. equities: TrimTabs

U.S. equity funds and global equity funds both suffered price declines in February, but with very different responses from investors. While U.S. funds endured their third-largest monthly outflow on record, global equity funds continued to attract cash.

U.S. equity mutual funds (MFs) lost an estimated $21.5 billion, in line with outflows in recent months. U.S. equity ETF owners sold $19.6 billion, the most in three years and the third-most in TrimTabs’ records.

For global equity MFs and ETFs, the story was very different. They received a combined $17.9 billion last month, even though they fell 4.9% (versus a 4.3% drop for U.S. equity funds). Global equity ETFs added $7.8 billion, their fifteenth consecutive monthly inflow. Global equity MFs received an estimated $10.1 billion, their eleventh consecutive monthly inflow and second-biggest inflow in the past six months.

Demand for bonds finally dried up as Treasury yields hit four-year highs. Bond MFs and ETFs shed $4.4 billion in February after drawing a record $53.3 billion in January. The outflow last month was the first since December 2016, and it came after inflows averaged $33.4 billion in the previous 12 months.

Investment Fund Strategies with Highest Net Flows in January

Posted on March 3, 2018 by Editorial Staff -

Source: Morningstar, Inc., February 28, 2018

A Fintech Fix for the Small Plan Cost-Crisis

Posted on March 1, 2018 by Kerry Pechter -

The 401(k) business and the petroleum business in the U.S. have this much in common: Like most of the big, easy-to-reach deposits of oil, most of the big, easy-to-identify retirement plan sponsors, with their huge employee-fed pools of savings, have been identified and tapped.

There’s still a lot of fossil fuel left in America, but much of it exists as bubbles in ancient shale. Similarly, billions of dollars in savings is waiting to be extracted and managed, but it’s atomized in the paychecks of millions of employees at tens of thousands of small establishments that either don’t yet have retirement plans, have poorly managed plans or plans that charge participants abusively high fees.

This is one way to look at the “401(k) coverage problem” and the “under-saving problem” that people in the retirement industry talk about. Ideas for solving the problem vary. The state of California, eager to facilitate savings by middle-class and minority workers, has set up a mandatory Roth IRA for small businesses. Big asset managers are backing legislative proposals to let unrelated, non-unionized small businesses join large virtual “multi-employer” plans.

“Fintech” firms bring a third option to the table. Backed by private equity, these firms are leveraging the Internet cloud, API technology, “machine learning,” low-cost passive investments and the latest in “on-boarding” practices to make 401(k) plans cheap, easy, and riskless enough for small company employers to sponsor.

One of those fintech firms is ForUsAll.com. It was co-founded in 2014 by Shin Inoue, David Ramirez and Dave Boudreau. All three are veterans of Financial Engines, where they helped turn Bill Sharpe’s Nobel Prize-winning investment ideas into the first and biggest 401(k) robo-advisor, with a current market cap of $2.26 billion. (Financial Engines recently announced a deal with ADP to increase its own penetration of the small and mid-sized 401(k) market.)

Initially funded by Foundation Capital (led by Financial Engines chairman Paul Koontz) ForUsAll markets its turnkey 401(k) services to existing small plans that it believes are underserviced and overpriced, rather than try to recruit employers who have never sponsored a plan.

ForUsAll recently received its third round of venture funding, for a total of $34 million, and it passed the $500 million mark in assets under administration. Shin Inoue (below right), the CEO, spoke with RIJ back in 2015, and then again a few weeks ago. Here’s an edited record of our most recent conversation.

RIJ: Shin, can you tell us a little about why you, David Ramirez and Dave Boudreau decided to leave Financial Engines and start ForUsAll?

Inoue: Twenty years ago, Financial Engines focused on the Fortune 500. It was the first ‘robo-advisor.’ Now that baby is all grown up. It serves $140 billion in assets. After FE went public in 2010, some of us took a step back and asked why, even with all our success, the system was still broken. America is $6 trillion underfunded for retirement.

When you dig into the data, you find that it’s not the people in plans at Fortune 500 companies who are hurting. It’s people in small firms—the 70 million people who are likely to be underserved or overcharged by the 401(k) industry.

Digging farther into the question of why the system doesn’t work, we found that the big financial institutions that administer 401(k) plans, like Vanguard, Fidelity, PayChex and ADP, have a hard time going down to small businesses and serving them well. In their business model, it’s hard to do it economically. That’s what’s preventing the retirement system from working for everybody. We founded ForUsAll to fix that problem. The only way to serve them well is with technology. That’s what we bring to the small and medium sized companies.

We provide the broker-advisor layer. By bringing technology to that layer and to the compliance layer, we provide the whole advisor package. The small plan advisors have no incentive to provide technology. We’re a registered investment advisor (RIA). We take on specific fiduciary roles, such as 3(38), 3(21) and 3(16) roles.

RIJ: How does ForUsAll distribute its services? Do you work with companies that don’t have any plan—green field plans—or just existing plans that you consider subpar? Do you have sales people?

Inoue: No boots on the ground. That would be very expensive. Clients generally find us online and through referrals. We’re not starting green field plans. Our sweet spot in terms of plan size is between 10 to 500 employees, but we have clients with thousands of employees. Initially we thought we would focus on companies with 10 to 50 employees, but realized we could help larger firms as well.

When we go to existing plans—the ones that we ultimately serve—they’re usually broken in two ways. First, compliance is out of whack. That’s underserviced, and it’s labor-intensive. Fixing mistakes in 401k plans, and anywhere in financial services for that matter, is costly and time-consuming. The brokers who sold the 401k in the first place usually don’t handle compliance very well. They don’t have that expertise. That’s where we come in. And we can cut the cost of the plan by half or two-thirds.

RIJ: What’s your range of fees?

Inoue: We charge employees somewhere between 0.45% and .7% all in. We wanted to keep it at about half a percent. We saw that as the average at large companies, and we wanted to provide small businesses with something comparable. From a cost standpoint, we wanted to make it a no-brainer. [See chart below for fee schedule on ForUsAll’s website.]

RIJ: And what kind of results are you seeing?

Inoue: We achieve close to a nine-out-of-ten to participation when we take over and contributions typically rise to 8%. So there’s twice as much going into the plan as there was before. Our virtual advisor, ‘DAVE,’ plays an important role in making that happen.

RIJ: According to your website, DAVE does a lot. He onboards new participants using text and email, explains enrollment options, helps people roll-over existing 401(k)s, offers Roth or traditional retirement plans, and explains the basics of investing in a 401(k).

Inoue: We’ve found in-person seminars to be pretty ineffective at engaging employees, answering their questions, and driving higher participation and savings rates. They aren’t one-on-one and it’s hard to retain information after just one educational session. DAVE distills the information down to the basics, allows participants to choose their own journey at their own pace, and allows them to revisit as they see fit.

I’d say DAVE’s success is rooted both in its ability to explain complicated financial topics in a way that’s easy to understand. As I mentioned above, every participant gets to customize their journey so they can dive deeper into areas they don’t understand and breeze past the areas that are familiar. There isn’t an ‘artificial intelligence’ component to DAVE yet.

RIJ: What other technologies have helped you drive down the costs? Is it APIs, or Application Programming Interfaces?

Inoue: APIs helped. But a bigger factor has been the move to cloud-based services. The cloud enables you to integrate the administrator and other functions. It lets you make connections with other systems.

RIJ: As far as your partners are concerned, you mentioned when we last talked that you were working with Lincoln Trust, which has rebranded as LT Trust.

Inoue: We work with most major recordkeepers, not exclusively LT trust. We almost always allow our customers to keep their employees’ money where it is—with their existing provider. We work with 35 recordkeepers now.

RIJ: And your asset manager?

Inoue: We use Vanguard funds a lot. New participants are defaulted into Vanguard target date funds with a contribution rate of 6% of pay, moving up 1% automatically over time to a maximum of 15%.

RIJ: You mentioned that at least some parts of the 401(k) system aren’t working. What isn’t working? The investment and the recordkeeping segments seem to be efficient that their services are commoditized. So what segment exactly do you intend to disrupt?

Inoue: There are three different types of players, or layers, that serve plan sponsors. First you have the mutual fund layer. Then there’s the record-keeper level. When you look at asset management and recordkeeping level, the top 25 players have a 90% market share. Then there’s a third layer that involves the brokers and advisors that sell and service the small plans. There are currently 307,000 brokers advising 650,000 small plans. That’s how fragmented the third layer is. There’s no reason why the small-plan 401(k) business should need 307,000 brokers.

RIJ: Yes, I’ve heard many 401(k) advisors called “blind squirrels,” who stumble into the plan business accidentally and advise only a couple of small plan sponsors. Most don’t specialize in 401(k) advice. So they can’t offer economies of scale and they don’t become experts in that area.

Inoue: When the Department of Labor audits small plans, two out of three plans fail. Last year, small companies paid $1.1 billion in fines to the DOL for failing their audits. So the mutual fund and recordkeeping layers work, but the broker level doesn’t. That’s what I call underserved. And they pay two to three times more in expenses than large plans do. That’s where the issue is. We’re offering to clean house in a very fragmented broker market.

RIJ: And how will you do that?

Inoue: The small plan market has been so fragmented that there were no incentives to invest in technology. But somebody had to make that investment. That’s what we’re doing. If you do it right, it’s a very scalable business. Just as the asset management and recordkeeping layers have consolidated, the advisor layer should consolidate. The top 25 providers in the broker layer should own 90% of the market.

RIJ: What trends exactly are making the existing model obsolete? Is fee compression reducing the incentives for advisors? Are they pricing themselves out of the market?

Inoue: Consolidation in the industry and the move to next-gen [digital] advisors like us are partly a natural evolution of fee compression. But the government’s introduction of fiduciary aspect of retirement plans—which I’m a big fan of—has also accelerated that process. The DOL is putting more auditors on the field and giving small plans the same level of scrutiny they give to big firms.

The DOL wants to make sure that the retirement assets are well taken care of, without conflicts. But it’s unreasonable to expect people at small companies with fewer resources to know everything they need to know. The only way to do that is to introduce technology that can take over the administrative burden, the compliance checks, and take on the liability. That’s the level of service that’s required now, and it’s now possible and feasible for us to deliver it.

RIJ: Thanks, Shin.

Bond Market Frets Over Treasury Supply

Posted on March 1, 2018 by Stephen Slifer -

Inflation fears sent the stock market into a tizzy in late January and early February. Those same fears rattled the bond market and boosted longterm interest rates. However, the fear of a sharp pickup in the inflation rate seems to have subsided and the stock market has recovered about half of what it lost. A rising inflation rate troubles the bond market as well, but its attention recently has shifted to larger budget deficits and increased Treasury supply in the years ahead. As a result, bond yields have jumped 0.5% since the end of last year.

Economists have been talking about escalating budget deficits for ages but, until now, the bond market has largely shrugged off any such concern. Politicians occasionally express some alarm, but they have been unwilling to do anything. Are rising bond yields an indication that budget deficits finally matter? Will our politicians in Washington be willing to do something? Our conclusion is that we are years away from any serious budget reform.

In late January the fear was that the economy was overheating, inflation was going to climb appreciably, and the Fed would be forced to raise rates more quickly than had been anticipated. The stock market swooned and registered its first “correction” in a couple of years. As is often the case the stock market overreacted. It still believes the economy has gathered momentum, inflation is headed higher, and the Fed may raise four times this year rather than three, but it now expects the interest rate ascent over time to be more gradual. As a result, the S&P 500 index has recovered about half of its earlier loss.

The bond market has not been so lucky. Bond yields have jumped 0.5% since the end of last year from 2.4% to 2.9%. While we thought that bond yields would rise in 2018, the runup has occurred much more quickly than we had anticipated. So, what’s bugging the bond market? Is it inflation, or is something else to blame? Our conclusion is that inflation has played a small role, but the bond market’s greatest fear currently is Treasury supply.

Long-term interest rates are closely tied to expectations of inflation. The measure of inflationary expectations we like the best is the implied inflation rate from the bond market. The Treasury has a nominal rate on the 10year note. It also has an inflationadjusted rate on the 10year note. The difference between the two represents an implied 10year inflation rate. It has risen in recent months but, at 2.1%, it can hardly be called troublesome and would not bother the Fed in the slightest.

First, tax cuts. The Congressional Budget Office initially estimated that they would add $1.5 trillion to budget deficits and debt outstanding during the next 10 years. Even if it tried to estimate the “dynamic” effects of the budget buts – i.e., tax cuts will stimulate GDP growth, generate more tax revenue, and partially offset some of the loss of tax revenue caused by the lower rates — the CBO still estimated that the deficit would increase by $1.0 trillion. While that estimate is still too high, the important point is that the recently enacted tax legislation will almost certainly boost budget deficits relative to the forecasts shown above – which were already problematical.

Second, President Trump and Congress agreed on a 20182019 budget deal which will increase both defense and nondefense spending. That additional spending will boost budget deficits for the next couple of years by an additional $300600 billion. No wonder the bond market is spooked. There is no longer any pretense of fiscal restraint.

Budget deficits matter because they add to the debt outstanding. If the government runs a $1.0 trillion budget deficit, the Treasury is forced to issue an additional $1.0 trillion of debt to finance that deficit. Debt as a percent of GDP today is 77%. It is expected to increase to 86% by 2026 and continue climbing to 125% of GDP within 20 years. And remember, these numbers were done prior to the tax cuts and prior to the increases in spending agreed upon over the next two years. They will go higher. Economists tend to believe that a debt to GDP ratio in excess of 90% can create problems.

Why? First, the ratings agencies may (once again) choose to downgrade Treasury debt which would increase the Treasury’s cost of borrowing. Second, the Fed will be reducing its holdings of U.S. Treasury bonds in the years ahead as it tries to shrink its balance sheet to a more sustainable level. Third, China and other foreign governments may be less willing to hold U.S. debt. They collectively own $6.3 trillion (or 42%) of the $14.8 billion such debt outstanding.

Foreign central banks cannot significantly reduce their holdings of U.S. Treasury debt because no other sovereign market is big enough to allow that to happen in any size. But they could at the margin cut back on their willingness to own U.S. Treasury debt and substitute euro or yendenominated debt instead. With Treasury debt poised to escalate any such marginal cutback would be bad news.

For purposes of comparison, the debt to GDP ratio for Greece is currently 180%. Prior to the recession the debt/GDP ratio in Greece was 103%. The recession boosted its budget deficits, triggered a crisis, and Greece had to be bailed out by its European Union partners. A recession in the U.S. at some point, which is inevitable, would exacerbate its debt woes. The U.S. may not be Greece, but there are lessons to be learned. Countries that do not prudently manage their government spending typically experience an unhappy ending.

Without wanting to be unduly alarmist, the U.S. has a problem. And the saddest part is that nobody in Washington seems willing to do anything about it. Because entitlement spending represents two-thirds of all government spending, the above situation is not going to be resolved without cutbacks in Social Security, Medicare, Medicaid, veterans’ benefits, and welfare benefits. And that is not going to change under this president. Any effort to reign in government spending is years down the road.

Homage to Andalusia

Posted on March 1, 2018 by Kerry Pechter -

In the tiny Pennsylvania borough where I live, you rarely see clusters of older people gathered outdoors in February—not unless it’s “$4 night” at our downtown movie house and a popular film is showing. Blockbuster, RedBox, Netflix and Amazon Prime have all failed to retire our 70-year-old Emmaus Theater.

But in Seville, Spain, where I spent part of January and February, you see lots of older people outside day and night. The sight of strolling elderly couples, of pensioners perched at pub tables outside the tapas bars, of matrons choosing bug-eyed langoustinos from beds of ice chips in La Mercado de Triana, made Seville seem like a convivial spot to grow old in.

Like illness, social isolation is a serious hazard of old age. In Pennsylvania, where cold weather can keep retirees housebound for months, the risk of a lonely old age feels very real. But no such problem seemed to exist in Andalusia, a sunny, arid region of southwestern Spain that has been ruled by successive waves of Tartessians, Carthaginians, Romans, Visigoths, and Moors before evolving into the Spain we know today.

It felt sometimes as if those foreign invaders never entirely left Seville, thanks to the palaces, churches and fortifications they left behind—and thanks to the ongoing invasion by tourists. Spain averages about 1.6 million tourists a week. Platoons of Chinese arrive by the busload. In the Barrio Santa Cruz, where the famous Alcazar Palace and Giralda Tower are located, the tourists (along with an army of attendant waiters, street musicians, gypsies selling rosemary sprigs, and drivers of horse-drawn carriages) generate a kind of manufactured buzz that amplifies the local buzz.

But the tourist trade doesn’t entirely explain the impression of an ongoing, entertaining circus of activity throughout the day and evening in Seville, a city of about 700,000. Across the Guadalquivir River (the name means “Big River” in transliterated Arabic) from the Barrio Santa Cruz, there’s a busy middle-class neighborhood called Triana. Local residents of all ages fill the pedestrian malls and the outdoor tables of sidewalk restaurants there. North of Barrio Santa Cruz, there’s a large open space called the Alameda de Hercules that’s lined with cafes. Outside one of them, a couple of dozen people in their 20s were swing-dancing to Big Band music. That was in the middle of a weekday.

Seville’s festivity doesn’t stop the inevitable consequences of old age, of course. While exploring one of the narrow stone-paved alleys (where old granite millwheels or “botarruedas” still reinforce the lower walls of villas, hostels and hotels), I saw a sign that said, Centro de Mayores, or Senior Center. Visible through a plate glass window was a group of pale, slow-moving, white-haired men and women in grey gowns. A few grasped the handles of walkers or slumped in wheelchairs. Their dayroom was clean and bright with garish fluorescent light. My request to enter and look around was politely denied.

A desire to research Spain’s retirement system for RIJ was my initial inspiration for visiting Seville. What I learned helped explain what I saw on the streets. For the past few decades at least, a typical male average-income worker in Spain could expect to retire at age 65 on a pension that replaces about 80% of his final or near-to-final income. After Greece, Spain has had the most generous national pension in the European Union.

The pension (along with the national health care system) is funded by a payroll tax of about 30%, of which employers pay 25%. This system isn’t quite as secure as it might sound: Housewives, as well as the owners and employees of Spain’s many small businesses, can fall outside of pension coverage. But the ample pension may explain the lack of anxiety that many people in Seville seemed to enjoy. As I reported a few weeks ago, however, the Spanish social security system is running an annual deficit of about $18 billion.

As for the young swing-dancers and buskers that made Seville’s streetscape so lively—their presence might have been a symptom Spain’s unemployment crisis. Nationally, the jobless rate is about 18%, down from about 25% during the Eurozone’s 2010 financial crisis. To achieve even an 18% rate, Spanish workers had to accept an across-the-board pay cut of up to 15%. Spain has succeeded in attracting tourists and foreign investment precisely because of that humbling “internal devaluation.”

A cynic might attribute Seville’s charms to a tourist’s illusions—a sunglasses-tinted view of a first-world society that is, frankly, enduring hard times. Still, the city’s residents radiated a modest, comforting joie de vivre (and an implicit desire to be in each other’s company) that I rarely feel back in Emmaus, Pa. It satisfied my inner hunger for the presence of lots of other people and the potential to know them. That, along with the reliable Andalusian sunshine, made me and my spouse think seriously about returning, if not retiring, to Seville.

Flight to passive funds continued in January: Morningstar

Posted on March 1, 2018 by Editorial Staff -

Investors started out the year by strongly declaring their preference for passive U.S. equity funds, which saw their largest monthly inflow since December 2016, according to “Morningstar Direct Asset Flows Commentary: United States,” which was released this week.

“Far from running away from the U.S. stock market, investors were eager to embrace it and its stable returns—but in the form of low-cost offerings only, it seems. ‘Returns,’ in this context, only refers to January and does not include February’s polar plunge, which saw the S&P 500 drop 7% through Feb. 12,” the report said.

According to the report:

Taxable-bonds front received a total inflow of $47.0 billion, almost equally distributed between active and passive. After raising short-term interest rates three times in 2017, the Federal Reserve decided to leave them unchanged at its first 2018 meeting on Jan. 30, which was also Janet Yellen’s last meeting as chairwoman.

International equity attracted $41.9 billion, with the majority of those flows going to passive funds.

Large blend was the overall top-flowing category in January despite a $7.3 billion outflow on the active side. Investors who switch to passive tend to prefer blend funds because they’re a good middle-of-the-road option between growth and value. Diversified emerging markets and foreign large blend were also in the top five but, unlike large blend, with positive flows on both the active and passive side. So was intermediate-term bond.

The trend of transferring assets to lower-cost, passive vehicles is continuing to expand to asset classes other than U.S. equity, where it started. Judging by flows, investors have given up on active management for U.S. equity, still find some value in it for international equity, and consider it highly valuable for fixed income.

High-yield bonds experienced outflows for the fourth consecutive month. The Tax Cuts and Jobs Act may have prompted some of the outflows, because it is limiting the tax-deductible amount of interest expenses.

High-yield debt companies will be negatively affected by this new provision because their interest expenses are much higher, and not being able to write them off will adversely affect profitability.

On the active side, American Funds rallied in January with a $7.9 billion inflow (all its funds are active). The two funds with the largest inflows were American Funds Tax Exempt Bond AFTEX and American Funds Europacific Growth AEPGX. Most of the top 10 companies enjoyed healthy flows in January. The few that did not do so well included Franklin Templeton and J.P. Morgan.

State Street enjoyed a second month of double-digit billion-dollar flows and almost caught up with Vanguard in terms of passive flows. Their flagship ETF, SPDR S&P 500 SPY, attracted the majority of the incoming money.

Ameriprise settles SEC claims that it over-charged retirement clients by $1.78 million

Posted on March 1, 2018 by Editorial Staff -

Ameriprise Financial Services Inc., the Minnesota-based broker-dealer and investment adviser, recommended and sold higher-fee mutual fund shares to retail retirement account customers and failed to provide sales charge waivers, the Securities and Exchange Commission announced this week.

Without admitting or denying the findings, Ameriprise consented to a cease-and-desist order, a censure, and a penalty of $230,000, the SEC said in a release. The SEC found that Ameriprise violated Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933.

Approximately 1,791 customer accounts paid a total of $1,778,592.31 in unnecessary up-front sales charges, contingent deferred sales charges, and higher ongoing fees and expenses as a result of Ameriprise’s practices, the SEC said.

Ameriprise “has cooperated with the Commission and voluntarily identified the affected accounts, issued payments including interest to the affected customers, and converted eligible customers to the mutual fund share class with the lowest expenses for which they are eligible, at no cost,” the SEC release added.

Ameriprise “disadvantaged certain retirement account customers by failing to ascertain their eligibility for less-expensive mutual fund share classes” and “recommended and sold these customers more expensive mutual fund share classes when less expensive share classes were available,” the release added.

Ameriprise also failed to disclose that it would receive greater compensation from the purchases and that the purchases would negatively impact the overall return on the customers’ investments, the SEC said.

‘Ameriprise generated greater revenue for itself but lower returns for its retirement account customers by recommending higher-fee share classes,” said Anthony S. Kelly, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, in a prepared statement.

”As evidenced by our recently announced Share Class Selection Disclosure Initiative, pursuing these types of actions remains a priority for the Division as we seek to get money back in the hands of harmed investors.”

The SEC’s investigation was conducted by Salvatore Massa, Steven J. Meiner, and John Farinacci of the Asset Management Unit, and supervised by Jessica M. Weissman.

Stock buybacks reach $113.4 billion in February: TrimTabs

Posted on March 1, 2018 by Editorial Staff -

Stock buyback announcements were high in February, suggesting that many corporate executives are using proceeds from the recent corporate income tax cut to support the stock prices on which much of their compensation is based, research firm TrimTabs reported this week.

New stock buybacks totaled $113.4 billion through February 22, which is already the highest volume in any month since April 2015. The largest announcements have been from:

Cisco Systems ($25.0 billion)
Wells Fargo ($22.7 billion)
AbbVie ($10.0 billion)
Amgen ($10.0 billion)
Google ($8.6 billion)
Visa ($7.5 billion)

Despite the $1,000 one-time bonus checks reportedly paid out to employees by various large employers subsequent to the passage of the new tax law, the buyback spurt indicates that the corporate tax cut may be helping business owners and investors even more.

At the same time, corporate liquidity flows have slowed amid the recent spike in equity volatility. Through Thursday, February 22, only $12.5 billion in cash had been committed to buy U.S. public companies in February. New equity issuance has slowed to $10.3 billion. Both of these volumes are among the lowest in the past year, TrimTabs reported.

U.S. ETF assets top $3.6 trillion: Cerulli

Posted on March 1, 2018 by Editorial Staff -

Investors added a net $51.3 billion into mutual funds in January, the highest monthly figure in over three years, according to the February 2018 issue of The Cerulli Edge–U.S. Monthly Product Trends Edition.

Total asset value grew 3.4%, to more than $15 trillion. ETF assets grew 6.1% month-over-month to more than $3.6 trillion, attracting net flows of more than $76.0 billion and 2.2% organic growth (growth achieved by internal investments of the firm as opposed to mergers or acquisitions).

In response to the steady migration to index funds and ETFs, “many asset managers are looking to multi-asset-class investments as a way to reestablish their competitive position,” Cerulli said in a release. Retail wealth management firms, like institutional asset managers, can address specific risks in investor portfolios by creating packaged multi-asset-class investments, Cerulli believes.

Most advisors (81%) agree that active management is ideal for certain asset classes, the release said. “Across all channels, advisors reported that actively managed ETFs make up 11% of their allocation across both active and passive products,” Cerulli said. “While this may be a small sleeve of advisor portfolios, this allocation persists among larger practices.”

If jobs were more flexible, seniors would work longer: NBER

Posted on March 1, 2018 by Editorial Staff -

There is a large, untapped pool of older Americans who have a strong desire to keep working, sometimes at wages significantly lower than the ones they earned previously, but only if they could have flexible work schedules.

That finding was expressed in “Older Americans Would Work Longer if Jobs Were Flexible,” an NBER Working Paper by John Ameriks, Joseph S. Briggs, Andrew Caplin, Minjoon Lee, Matthew D. Shapiro, and Christopher Tonetti. “About 40% of retirees surveyed were willing to return to work in a job like their previous one, but 60% would return if the schedule were flexible,” an NBER summary of the paper said.

The researchers’ primary data source was the Vanguard Research Initiative, a linked survey-administrative data panel drawn from account holders at The Vanguard Group, Inc. The researchers used the sample of 3,000 respondents who completed a survey related to later-in-life labor market activities. The survey focused on labor market participation and retirement, including a detailed history of employment, job search behavior, retirement paths, and employment in post-career “bridge” jobs.

About 40% of retirees—33% of those who did not have a bridge job and 44% of those who did—said they were willing to work if all the conditions were the same as in their last job, including wages and total hours, but 60% would be willing to return to work with a flexible schedule.

In addition, 20% of retirees would be willing to take an hourly wage reduction of 20% or more in return for more flexible hours.
Among those who had not held a post-career “bridge” job, the researchers found that only 11% had searched for a job opportunity after leaving their career job, but a third of them would be willing to work again in a job that had characteristics similar to their previous one.

The researchers concluded that demand-side factors play an important role in explaining later-life labor market behavior, writing that “older Americans’ labor force participation near and after normal retirement ages is limited more by a lack of acceptable job opportunities or low expectations about finding them, in particular jobs with part-time or flexible schedules, than by unwillingness to work longer.”

The share of Americans over 65 is projected to hit 40% by 2050, up from 20% in 2007. As the percentage of older Americans rises, concern is growing about the financial strains associated with a larger number of retirees being supported by each active worker. There’s also worry that some employers may face labor shortages, the paper’s authors found.

A possible response would be to enact or encourage policies that would allow older Americans to work beyond traditional retirement ages. Determining what sort of policies would encourage longer working lives is challenging because it is difficult to disentangle the roles of labor supply and labor demand in determining existing patterns of later-life labor market behavior, the NBER summary said.

Debel to lead MetLife’s institutional retirement business

Funded status of S&P 1500 pensions rose 1% in February

After dip, global equities outdraw U.S. equities: TrimTabs

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