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Phoenix issues MYGA annuity

Posted on March 22, 2018 by Editorial Staff -

Nassau Re, a three-year-old holding company that owns the Phoenix Companies, Saybrus Partners and Golden Gate Capital, announced its first branded annuity product this week, a single-premium multi-year guarantee annuity (MYGA).

The product is called Nassau MYAnnuity. It will be sold through independent marketing organizations (IMOs). It will offer a guaranteed interest rate “up to 3.5%,” said Tom Buckingham, chief product and service officer for Nassau Re’s insurance segment, in a release.

The annuity is available with either a 5-year or 7-year duration, and customers can make a single premium payment ranging from $15,000 to $1 million. Currently, the guaranteed interest rates are 3.40% for 5X and 3.50% for 7X. If contract owners can choose to keep the right to take a 10% “free withdrawal” of up to 10% of their premium, their guaranteed interest rate will be 0.25% less.

Under the terms of the contract, required minimum distributions (RMDs) do not incur surrender charges or market value adjustment. At the end of the guarantee period, customers can select to surrender any amount of the contract or renew the contract for either the same or different duration, depending on what is available at the time.

All contracts have a death benefit equal to the contract value. Customers can annuitize the contract any time after the first year and choose from seven fixed annuity payment options. Early withdrawal penalties may be waived for certain conditions, such as nursing home confinement and terminal illness, subject to state approval.

Fixed annuity sales end 2017 on positive note: LIMRA SRI

Posted on March 20, 2018 by Editorial Staff -

Total annuity sales, including exchanges, were down 8% in calendar 2017, to $203.5 billion, as prolonged low interest rates and anticipation of the Department of Labor (DOL) fiduciary rule dampened manufacturers’ appetite for business, according to LIMRA Secure Retirement Institute (LIMRA SRI).

For the year, indexed annuity sales fell 5% to $57.6 billion, compared with the prior year. Last year was the first year since 2009 where annual indexed annuity sales declined. Allianz Life of North America, Athene Annuity & Life and Nationwide held 29% of market share. The top 10 companies represented 63% of the market in 2017.

In the fourth quarter of 2017, however, year-over-year sales of book value fixed-rate annuities rebounded 11%, to $4.9 billion from $4.5 billion, on rising interest rates. Indexed annuity sales rose 5% (to $14.7 billion from $14.0 billion) in the fourth quarter, relative to the same period in 2016, on news that the Trump administration would postpone implementation of the fiduciary rule until July 2019 at the earliest.

Variable annuity (VA) sales were down 9% to $95.6 billion, falling below $100 billion for the first time in 20 years. VA sales have fallen 40% from their 2011 peak of $158 billion. Sales in 2017 were concentrated at the top, with Jackson National Life, TIAA (a group annuity seller) and AXA US, representing 42% of sales. The top 10 issuers accounted for 78% of the VA market.

At $107.9 billion, overall fixed annuity sales surpassed $100 billion for the third consecutive year while falling 8% from 2016 levels. The top three sellers, New York Life, AIG Companies and Allianz Life of North America, represented 24% of sales. The top 10 issuers accounted 53% of the market in 2017.

‘We Shall Never Surrender!’

Posted on March 16, 2018 by Kerry Pechter -

Winston Churchill’s famous speech about defending Britain on the beaches, landing grounds, fields, streets, and hills—“We shall never surrender,” the scowling cigar smoker snarled—was invoked at the Insured Retirement Institute’s marketing conference in Orlando this week. His words couldn’t have been more fitting.

Like Britain in 1940, the IRI (and the annuity issuers and sellers for whom it has lobbied since 2008) needs a rallying cry. Eight years of hostility from the Obama administration, a nine-year bull market in risky assets, and a decade of low interest rates have taken a gradual but unmistakable toll on the annuity industry.

Annuity sales are now at their lowest point in two decades. At a time when the insurance industry hoped and expected that Boomers would be buying personal pensions, stocks have eclipsed annuities—to the point where annuity issuers are touting their products as ways for risk-averse investors to obtain equity exposure.

With a patently pro-business administration in power, you might expect IRI’s mood to be buoyant. The political wind is at its back, and the Retirement Enhancement Security Act, which it favors, could pass very soon. But optimism didn’t seem especially high in Orlando. Either the Trumpian tailwind is too volatile to inspire confidence or the IRI is marking time; no successor to retiring CEO Cathy Weatherford has yet been named. Or perhaps there was a lot of activity in the side-meetings to which RIJ didn’t have access.

On the other hand, several big annuity issuers tent-poled the conference with sponsorships and speakers with energetic new stories to tell. They included AXA, Brighthouse Financial (formerly MetLife’s retail division), Great-West Financial, Jackson National Life, and New York Life.

The GMAB: Back again for the first time

New York Life’s Renee Hamlen used her time at the podium to announce that her company intends to distribute an old product (a variable annuity with a guaranteed minimum accumulation benefit (GMAB) through a new channel (third-party distributors and advisors) as well as through its captive agents.

The GMAB product promises that a given premium will grow to at least a specific size over a specific term. New York Life’s GMAB features 10, 12, 15 and 20-year terms. New York Life claimed a 52% market share in this product niche in 2016, with sales of about $3 billion.

Hamlen, a vice president and head of annuity marketing at New York Life, said that product attracts a younger client (average age 53) than a VA with a lifetime income benefit. A New York Life survey of 350,000 GMAB policyholders showed that they hold about 20% more in equities than people without the protection.

The benefit’s expense (1.30% per year) will be applied to the premium, not the account value or the benefit base. “We won’t be charging clients for growth,” Hamlen said. An enhanced death benefit would cost 0.25% per year more. “This is a market expansion for some of us,” she added. “Guaranteed income isn’t necessarily what all of our clients want.”

Nag-Bushan Odekar, the vice president of individual marketing at Great-West Life and Annuity Insurance Co., then discussed the benefits of product diversification during retirement. He demonstrated that a portfolio with a combination of risky and insured assets delivers the highest annual incomes over time.

Odekar showed that a person with $1 million of invested savings at age 65 could generate as little income as $34,873 from a 60% stock/40% bond portfolio (through Bengen’s “4%” method adjusted downward for today’s low interest rates, perhaps) and as much income as $65,300 a year by purchasing a single premium immediate annuity (SPIA), at current rates.

But similar $1 million investors (assuming of course that they lived long enough to collect on their longevity bets) could greatly increase his income, Odekar demonstrated, by using a hybrid investment strategy that involved a variable annuity with a lifetime income benefit (VA/GLWB) and a deferred income annuity (DIA) as well as a SPIA and investments.

By age 85, he said, someone with about 39% of their money in the VA/GLWB, 20% in a DIA, 31% in a 60/40 portfolio and 10% in a SPIA would have an income of $94,316. By comparison, someone with only a 60/40 portfolio could expect about $63,000 at that age and someone with only a SPIA could expect $65,300–the same as at age 65.

Living up to Snoopy

In his turn on stage, Jackson National Life marketing chief Dan Starishevsky discussed his firm’s new marketing initiative, whose slogan is “retire On Purpose.” A booklet based on that theme, to be distributed by Jackson wholesalers to advisors for use with clients, employs questions and word clouds to help clients start articulating their vision for retirement.

The concept is not unprecedented–many advisors have used flash cards or “roadmaps” to help clients visualize the events and challenges they might face in retirement. For that very reason, it’s a high-percentage bet. The lightly branded booklet by itself may not drive sales, but it may support those advisors who are already inclined to recommend Jackson products.

Jackson is currently reorganizing its geographical positioning. As reported in the Denver Post last month, the company is closing its Denver-area office and laying off 370 people there. It is also downsizing in Wisconsin, Florida and California. At least some Denver-based workers will relocated to Nashville. Jackson National, a unit of Britain’s Prudential Plc, is based in Lansing, Michigan.

Brighthouse Financial’s head of marketing, Alex Dowlin, shared some insights gleaned from the company’s Financial Insights Panel. The former retail division of MetLife, now a publicly-held company partly-owned by MetLife, has engaged psychologists and economists to help it craft a distinctive, authoritative voice through thought-leadership efforts. “We’re a year into this,” he said.

Brighthouse wants to sponsor “evergreen” content that “will empower advisors to have more product conversations with their clients and build stronger advisor-client relationships,” Dowlin said. His reason for pursuing evergreen content: “Fidelity does a great job with real-time [news-based] content. We can’t compete with that.”

In-house surveys showed Brighthouse that its thought-leadership efforts should engender an image of “likability,” “relevancy,” “distinctiveness,” “believability” and “trustworthiness.” So far, the firm’s publications yielded high scores on trust but not so much on “optimism” and “distinctiveness.”

That finding evidently tripped an alarm at Brighthouse. “We’re a company that prides itself on creating optimism,” Dowlin said, perhaps referring to MetLife’s long association with Snoopy and other beloved Peanuts cartoon characters. “The question is, ‘Does the content move the needle for the company?’ The content has to point to Brighthouse.’”

Coaxing investors off the sidelines

AXA’s speaker at the conference was Brad Fiery, head of Insights and Analytics, which will soon be holding an IPO and separating legally from its French parent. Fiery presented the results of a survey conducted for AXA by the retirement research firm Greenwald & Associates.

The research involved a survey of investors ages 50 to 70 with between $300,000 and $1 million in investable assets. In that sense, their households were among the richest 25% of Americans. Much of the presentation consisted of videotapes of focus groups involving a half dozen people.

Each had less than 50% of their assets allocated to equities. Equity allocation tends to correlate with education; by their dress and manner of speaking, and their lack of financial expertise, they didn’t seem highly educated (although outward appearances, of course, can be deceptive).

The focus groups, in short, showed that this type of investor might hold a higher percentage of equities if they could do so through a product very like AXA’s popular Structured Capital Strategies indexed variable annuity. This product offers more downside protection than a variable annuity and more upside potential than an indexed annuity.

The product, which runs for terms of up to five years and doesn’t offer living benefit options, puzzled some people when AXA introduced it in 2010. But as of last May it had $10 billion in cumulative sales. Fiery told RIJ that AXA’s annuity sales would be flat without it. That success has inspired Allianz Life, Brighthouse, CUNA and (as of last month) Great-West to introduce similar products.

Also presenting at the conference was Ron Mastrogiovanni, CEO of HealthView Services and HealthyCapital, who spoke on the topic of using annuities to offset medical expenses in retirement. HealthView Services’ software “opens the door for advisors to offer investment strategies to cover health care expenses.”

Thumping Trump

If you like Donald Trump, you would probably not have enjoyed the keynote speech at the IRI conference. Jon Meacham, the Pulitzer Prize-winning biographer of Andrew Jackson and George H.W. Bush, was politely but unsparingly critical of the current president.

“There’s just not a lot going on there,” he said when asked to describe Trump’s psyche. “I’m not a partisan,” he added, “but the progression from Ronald Reagan to Donald Trump seems to disprove Darwinism.” Comparing the Trump White House to the president’s own long-running TV program, he said, “It’s a rolling reality show that unfortunately has real world effects.”

Our leaders, Meacham concluded, need to demonstrate three qualities in order to guide us through the crisis: Curiosity, Candor, and Empathy. Ideally, Meacham said, “a leader should point forward, not at other people.” More like Winston Churchill, that is.

‘Circuit Split’ over DOL Fiduciary Rule?

Posted on March 16, 2018 by Kerry Pechter -

The New Orleans-based U.S. Court of Appeals, Fifth District, has reversed the ruling of a federal district court and “vacated” the Obama Department of Labor’s controversial Fiduciary Rule “in toto.” In her March 15 ruling, Circuit Judge Edith H. Jones called the rule “an arbitrary and capricious exercise of administrative power.”

The ruling was a victory for the plaintiffs, who included the American Council of Life Insurers, the National Association of Insurance and Financial Advisors, the Financial Services Institute, the U.S. Chamber of Commerce and several other lobbyists or trade groups representing various manufacturers or distributors of indexed annuities.

But hold the celebration (or funeral, as the case may be). Earlier this week, on March 13, the Denver-based U.S. Court of Appeals, Tenth Circuit, affirmed a lower court ruling in favor of the fiduciary rule. In Judge Paul J. Kelly’s 16-page opinion, the Obama DOL “examined the relevant data and articulated a rational connection between the facts found and the decision made” and therefore did not act in an arbitrary or capricious manner, as charged by Market Synergy Group, a Topeka-based insurance marketing organization.

Though two circuit courts disagreed, the disagreement may not have been direct enough to constitute a “circuit split” that would impel the case to the Supreme Court. [For an expert opinion, see attorney Marcia Wagner’s comments in RIJ today.]

But the two judges took clearly opposing views of the business issue in the case. Judge Jones, a Reagan appointee, accepted the industry’s argument that the costs of compliance with the fiduciary rule outweigh any consumer benefits it might produce. Judge Kelly, a George W.H. Bush appointee, specifically accepted the Obama DOL’s argument that “the benefits to investors outweighed the costs of compliance.”

Here’s RIJ’s take on the news:

The evolution over the past 43 years of defined benefit plans into 401(k) plans and 401(k) plans into rollover IRAs, with rollover IRAs emerging as the de facto final vessel for trillions of dollars of tax-deferred savings for tens of millions of Americans, has resulted in a regulatory, legal and political train wreck.

Over those four decades, changes in the delivery of financial services have outpaced changes in the regulatory framework around retirement savings. During that time, the boundary between regulations for individual savings vehicles (IRAs) and institutional or group savings vehicles (mainly 401ks) has become blurred. The difference between a mere broker or agent and a “trusted advisor” has also become blurred.

With the unanticipated rise of the rollover IRA, the line between the Department of Labor’s jurisdiction and the Securities & Exchange Commission’s jurisdiction has turned grey and blurry. The conflict between individual choice and the type of consensual group behavior necessary for the achievement of public policy goals—which is relevant in this case—has always been and always will be present in situations like this.

So a highly politicized fog has descended on the question of whether the DOL fiduciary rule should be upheld or ditched. The law, as ever, is open to endless interpretation, a good deal of it driven by politics or ideology. But the fundamental issue in the fiduciary rule debate, I think, can be reduced to fairly clear questions:

When people roll over their 401(k) group plan assets to an individual IRA, should they keep or lose the Department of Labor-enforced protections and restrictions that they had in the group plan? Should they instead be entirely free (within the tax laws) to take their money into the financial marketplace and enjoy the risks and benefits of a caveat emptor relationship with any type of service provider?

Naturally, different interest groups have different answers. The Obama Department of Labor, believing that the loss of ERISA protections is hurting the public’s retirement readiness and thwarting the intent of the pension laws to encourage and protect long-term savings, was determined to extend the 401(k) protections/restrictions into the rollover IRA realm by creating the fiduciary rule. It says that if you advise an IRA, you’ll be held to the same standards as an advisor to a 401(k).

The financial services industry, mindful that the fiduciary rule would limit or at least complicate its members’ ability to sell mutual funds and equity-linked annuities into the multi-trillion dollar rollover IRA market, believes that people should be free to do what they want with their rollover money. In court, it claimed that its interests align with the public’s interests. Judge Jones appears to have agreed.

The lack of consensus on these issues isn’t surprising, if only because of certain inherent ambiguities. Defined contribution plans aren’t really pension plans; they’re profit-sharing plans with no specific retirement income provisions that would characterize them as pensions. Rollover IRAs are even less pension-like: they’re simply tax-deferred personal savings vehicles.

The Obama DOL’s effort to extend its jurisdiction to IRAs was arguably a stretch. (The Obama administration exercised its will through regulations because the legislation route was blocked by the Republican Congress.) But without it, defined contribution plans will continue to become mere incubators of future brokerage accounts, and not incubators of personal pensions.

In my opinion, allowing IRA rollover money to escape the protections and restrictions that govern 401(k) plans will eventually nullify the federal government’s rationale for tax deferral—a benefit that the financial services industry, ironically, wants badly to protect.

What the Divergent DOL Rulings Mean: Wagner

Posted on March 16, 2018 by Editorial Staff -

With two federal appellate courts this week producing apparently divergent opinions in cases involving financial industry challenges to the Department of Labor’s Fiduciary Rule, RIJ turned to ERISA specialist Marcia Wagner of the Boston-based Wagner Law Group for an interpretation of the results.

RIJ: The Fifth and Tenth circuits came up with opposite decisions on the DOL this week, right? Does that mean a “circuit split” has occurred, and that the matter will have to go to the U.S. Supreme Court for resolution?

Wagner: The decisions of the Tenth Circuit and the Fifth Circuit were only in conflict to a limited extent, because the Tenth Circuit opinion did not consider whether the DOL had authority to revise the Fiduciary Rule in the manner that it did or to issue the Best Interest Contract Exemption.

The Tenth Circuit opinion only addressed three issues under the Administrative Procedure Act:

(i)             Did the DOL provide adequate notice of its intention to exclude fixed indexed annuities from Prohibited Transaction Exemption 84-24?
(ii)           Did the DOL adequately consider the economic impact of its decision?
(iii)          Was it arbitrary and capricious for the DOL to treat fixed indexed annuities differently that other fixed annuities?

The Tenth Circuit rejected all of these claims [i.e, that DOL failed to meet its duties]. Those specific issues were not before the Fifth Circuit. Rather, the Fifth Circuit opinion invalidated the Fiduciary Rule and the BICE Exemption. The Fifth Circuit only discussed fixed indexed annuities towards the end of its opinion.

While it held that the DOL’s treatment of fixed indexed annuities was unreasonable (and to that extent its decision is in conflict with the Tenth Circuit), its holding that the DOL overstepped its authority would have been the same had there been no discussion of fixed indexed annuities.

Even though there is not a clear conflict among the Circuits, however, this case will likely be heard by the Supreme Court (although the DOL might ask the Court of Appeals for the Fifth Circuit to hear the matter before the entire Fifth Circuit, rather than just before the 3 Judges who initially decided the case.)

Even though the Trump Administration is not a supporter of the rule, it is expected that they will continue to defend it, except with respect to the class action waiver issue. In the interim, the DOL will continue with its review of the Fiduciary Rule and the related prohibited transaction exemptions.

Roger Ibbotson embraces indexed annuities over bonds

Posted on March 16, 2018 by Editorial Staff -

A new whitepaper from Annexus, the FIA design firm, and Zebra Capital Management, founded by retired Yale economist Roger Ibbotson, analyzes the potential of fixed indexed annuities (FIAs) as an alternative to bonds in retirement portfolios, according to a release by Zebra Capital.

The whitepaper, “Fixed Indexed Annuities: Consider the Alternative,” is based on research suggesting that “uncapped FIAs help control equity market risk, mitigate longevity risk, and have the potential to outperform bonds in the near future,” the release said.

Total returns from bonds may be low enough in the future to place many Americans at risk of outliving their retirement savings, the report said.

“Shifting market conditions, longer life expectancies, and uncertainties surrounding the future of Social Security have [an immense impact] on our U.S. economy,” said Mr. Ibbotson in the release. “These conditions [may] result in a perfect storm where investors may be left with insufficient funds to carry them through retirement.”

“Conventional wisdom has most investors de-risking their portfolios by allocating more heavily to bonds as they approach retirement,” the release said. “Investors should consider other alternatives such as FIAs.”

Zebra Capital and Annexus used S&P 500 Index dynamic participation rates to simulate FIA performance over the past 90 years and presented the results in a fashion similar to Ibbotson’s SBBI (Stock, Bonds, Bills and Inflation) chart.

Their findings, which considered historical volatility, interest rates, and dividend rates, showed that uncapped FIAs would have outperformed bonds on an annualized basis for the past 90 years. “Uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk,” the release said.

Conning reports on 2017 insurer M&A activity

Posted on March 16, 2018 by Editorial Staff -

Insurer mergers and acquisitions moderated in 2017, and were “focused on tactical acquisitions and divestitures to better position for future profitability,” according to a new study by Conning.

“Insurer merger and acquisition activity in 2017 continued at the levels seen in 2016, which were itself a retreat from prior years’ levels,” said Jerry Theodorou, vice president, Insurance Research at Conning, in a release. He attributed the lower activity levels in part to “moderate economic growth and the uncertainty regarding tax reform, which finally resolved in December with passage of the Tax Cuts and Jobs Act.”

“Insurer mergers and acquisitions in 2017 centered around bolt-on property-casualty specialty acquisitions, run-off dispositions in both the life and property-casualty sectors, and vertical integration in the health/managed care sector,” said Steve Webersen, head of Insurance Research at Conning.

“Large-scale consolidations were conspicuously absent, and the recurring theme was tactically driven divestitures and acquisitions meant to reposition insurers to face the future,” he added.

“The repositioning was especially evident among life insurers exiting certain geographies, products and run-off businesses. Many of the buyers were newly formed firms, attracted to the asset management opportunities afforded by life insurer portfolios. Insurers actively exited underperforming lines and entered specialty segments offering healthier growth and margin prospects.”

The Conning study, “Global Insurer Mergers & Acquisitions in 2017: Repositioning to Face the Future” tracks and analyzes both U.S. and non-U.S. insurer M&A activity across property-casualty, life-annuity and health insurance sectors. Specific transactions are detailed, and trends are analyzed across all sectors. The report is available for purchase at www.conningresearch.com.

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.

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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