Archives: Articles

IssueM Articles

A Pre-ICO Lunch at Gibraltar

Posted on March 29, 2018 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It’s Hot Around the ‘Collar’

Posted on March 29, 2018 by Kerry Pechter -

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

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

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

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

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

Great-West Capital Choice

This product is a single-premium indexed variable annuity with a one-year point-to-point crediting method and exposure to four different equity indices: S&P 500, Russell 2000, NASDAQ-100 and MSCI-EAFE. The protection strategy costs 1.20% per year and the six-year surrender period starts with a 7% penalty.

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

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

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

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

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

“Also, there are a lot of financial advisors with a huge legacy book of VAs whose owners bought them for income but don’t need the income. Instead of paying 3.5% or 4% fees for that product, they can exchange it for our product, which costs only 1.20%. That will be a differentiator for us.”

Innovator Defined Outcome ETF Series

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

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

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

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

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

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

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

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

Sales potential

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

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

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

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

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

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

No surrender penalty on Jackson National’s new advisory FIA

Posted on March 29, 2018 by Kerry Pechter -

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Another buffered index annuity, from Great American

Posted on March 29, 2018 by Editorial Staff -

Great American Life has introduced a variable-indexed annuity, the Index Frontier 7. The contract links investor returns to the performance of several indices, including the S&P 500 Index, iShares U.S. Real Estate ETF or the SPDR Gold Shares ETF.

“The potential for stock market corrections could mean it is time for consumers to rebalance their financial portfolios,” said Joe Maringer, national sales vice president, Great American Life, in a release. The product will be sold by commission but a no-commission version is planned, Maringer told RIJ.

Variable-indexed annuities were introduced in 2014, sales in the category were less than $500 million. Sales of these products exceeded $9 billion in 2017, the Great American release said.

The current version of Index Frontier 7 offers a -10% floor, which prevents any loss beyond 10%. It doesn’t offer a buffer; a -10% buffer would protect investors only from the first 10% loss; any further loss is borne by the investor.

The caps for the “growth” versions of the index strategies are 11.5% for the S&P 500, 14.0% for the SPDR Gold Shares and 20% for the iShares U.S. Real Estate ETF. The caps for the “conserve” versions of the index strategies are 4.50%, 5.25%, and 6.5%, respectively.

“We have a zero floor ‘conserve’ version—you can think of it a traditional FIA strategy. Then we have the “growth” -10% option. If you only wanted 5% exposure on the downside you could allocate 50/50 into each of the strategies,” Maringer said.

“Or, if you captured a gain in one year, say up to the 20% cap on real estate, you could then move the principal and the gains into the zero floor option to protect from losses and still participate should there be growth. It offers a true insurance component on what is a registered product.”

According to a product brochure, the caps for Index Frontier 7 do not have annual administrative fees, mortality and expense charges, or 12b-1 fees.

The product offers tax-deferred growth, lifetime income options and a seven-year early withdrawal charge period. There’s a $25,000 minimum initial contribution requirement and a $10,000 minimum for subsequent contributions.

Great American Life Insurance Company is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance. It is a subsidiary of American Financial Group, Inc. (AFG), a Fortune 500 company with assets of $60 billion as of December 31, 2017.

RIAs will continue to resist indexed annuities: Cerulli

Posted on March 29, 2018 by Editorial Staff -

Assets in mutual funds fell sharply in February, reduced by 3.3% to $14.8 trillion, down from $15.3 trillion in January, according to the March 2018 issue of The Cerulli Edge, US Monthly Product Trends Edition for February.

Net flows dipped into negative territory during the month (-$2.1 billion), but they remain positive for 2018 YTD ($50.9 billion). February 2018 was the first month since January 2016 when ETFs collectively suffered net negative flows, losing $4.2 billion. Like mutual funds, ETF assets also decreased, dropping 3.9% for the month.

The Product Trends Edition for February covers registered investment advisor (RIA) distribution strategies and managed account services offered by 401(k) plan sponsors.

It will be an “uphill battle” to convince RIAs to sell more fixed indexed annuities, given RIA’s “proven lack of adoption of variable annuities.”

Cerulli’s report said that RIA distribution strategies must be consultative and convey how annuities can be implemented within the firms’ established investment process. To sell FIAs, firms may need to add portfolio and/or product specialists, as asset managers have done.

In a 4Q 2017 Cerulli survey of 401(k) plan sponsors, 60% of respondents indicated they offer a managed account service to participants. Nearly 45% of 401(k) plan sponsors surveyed said they believe “managed accounts help participants with retirement income.”

In UK, Prudential makes risk transfer easier for small pensions

Posted on March 29, 2018 by Editorial Staff -

Prudential Financial and the Pension Insurance Corporation (PIC) have announced a new approach for expediting longevity reinsurance transactions for smaller pension buy-ins and buy-outs.

“This new approach combines an advance commitment of capital, known pricing and the bundling of multiple transactions into a single closing to enable PIC to more nimbly and efficiently address the risk transfer needs of small pensions and their retirees,” according to a joint release.

The approach, called a “flow reinsurance structure,” is designed to increase the insurer’s capital efficiency while reducing the administrative burden of the primary insurer and the reinsurer, the release said.

The process streamlines the reinsurance transaction process for PIC’s smaller pension buy-in and buy-out transactions that meet pre-agreed criteria. These blocks will be reinsured by Prudential at the model-determined price.

Historically, the longevity reinsurance market for smaller pension buy-ins and buy-outs has been difficult to serve because of the complexity and administrative burden of pricing and executing contracts for each small transaction.

Prudential and PIC, having worked together for years on multiple risk transfer transactions, started collaborating on this project almost two years ago as part of a joint effort to find better, more efficient ways to serve these smaller pension schemes.

At year-end 2017, PIC had insured 151,600 pension scheme members and had £25.7 billion in financial investments, accumulated through the provision of tailored pension insurance buy-outs and buy-ins to the trustees and sponsors of U.K. defined benefit pension schemes.

Weatherford announces retirement, IRI looks for new CEO

Posted on March 29, 2018 by Editorial Staff -

The Insured Retirement Institute (IRI) is looking for a new president and CEO.

IRI formally announced this week that its president and CEO, Cathy Weatherford, would retire effective December 31, 2018 after serving for 10 years.

IRI members, including most variable annuity manufacturers and distributors, have been aware of the planned retirement for some time.

Weatherford, a former state insurance commissioner in Oklahoma, has been the only person to lead the organization since it changed its name from the National Association of Variable Annuities in 2008 and began full-time advocacy for retirement industry interests in Washington, D.C.

Recently, the IRI was part of the fight against the Department of Labor fiduciary rule and in favor of the Retirement Enhancement and Savings Act.

The IRI board of directors is conducting a search to recruit her replacement. In 2015, the job paid a total compensation of $790,278, including a base salary of $554,518, bonus compensation of $215,000, $8,760 in deferred compensation and $22,000 in nontaxable benefits, according to the most recently available Form 990, which non-profit firms must file.

The job description, search strategy and the list of search committee members are available here. The financial services recruiting firm Wilbanks Partners will assist the search committee. It intends to identify potential prospects and interview candidates through the spring, identify finalists by mid-year, and have a new CEO employed this fall, the release said.

The search committee, with the IRI board’s executive committee, will look among “senior professionals in national leadership roles in both legislative branches and regulatory agencies, as well as C-suite executives (and alumni) at financial services firms who have strong thought leadership and advocacy track records,” IRI said.

In a statement, Weatherford said, “2018 will be my tenth year at IRI and I am looking forward to setting IRI on the track for another twenty five years of being the first-call association for the retirement income industry.

“Over the course of my career, my objective has always been to implement forward-thinking policies that benefit the constituents, consumers, employees, members, men, and women whom I have served.”

In its Form 990 for 2015, IRI reported revenue of $6,342,844, including $3.45 million from membership dues, $1.48 million from conference services, $1.1 million from its Premier Alliance Program and $295,000 from industry-wide training programs. Expenses were $6.49 million, of which about $3.9 million were salaries.

As of the end of 2015, the IRI reported $1.43 million in non-interest-bearing cash and $2.04 million in savings and temporary cash investments. It reported $4.9 million in total assets and $3.48 million in total liabilities.

Fund flows turn negative in February: Morningstar

Posted on March 29, 2018 by Editorial Staff -

Overall, this February seems to have been a record of lows, with investors shaken by the wild swings in the market and keeping their distance. January’s flows across all category groups totaled $128.1 billion. In contrast, February’s total amounted to a negative $7.7 billion.

If one still had any lingering doubt about how bad last month actually was in terms of flows, one only had to look at Vanguard: almost $33 billion in January, barely $12 billion in February. If the reigning provider saw such a drop, just imagine what everyone else must have endured.

February was a roller-coaster month for the U.S. stock market, with all major indexes plummeting, then floating back up, then dropping again to end the month in negative territory. This volatility was reflected in the flows, with investors running away from U.S. equity—not only from active funds but from passive ones as well.

Redemptions of $8.4 billion from passive U.S. equity marked the first monthly outflow for the category since April 2015.

Although international markets suffered in tandem with the U.S. market last month, the international-equity category group didn’t stop growing in February. Instead, it dethroned taxable bond, which had enjoyed the largest flows for quite a while, and led with a $22.8 billion inflow overall, most of it to passive funds.

Inflation and interest-rate concerns caused taxable-bond flows to diminish last month to only $5.2 billion. It was the smallest inflow for taxable bond since November 2016.

Large blend landed on the bottom-flowing list last month, after having been among the top-flowing Morningstar Categories despite outflows on the active side. The category is usually the beneficiary of passive flows because investors who index tend to prefer large-blend (as opposed to growth- or value-specialized) funds. With overall passive flows into U.S. equity taking a dive in February, large blend was the hardest hit.

Foreign large blend and diversified emerging markets remained in the top five as investors continued to focus on international equity. Intermediate-term bond continued to be the most popular option in the taxable-bond category.

Interestingly, the flows driven by February’s market shock didn’t seem to discriminate as much between active and passive. All top five categories experienced inflows on both the active and passive side, and all categories with the largest outflows (except large growth) experienced the same pattern.

It seems investors are much more meticulous about active versus passive when it comes to depositing their money than withdrawing it. Susceptible categories experienced redemptions on both sides, and for one month it seems the “outflows from active, inflows to passive” pattern was, if not broken, at least disrupted.

High-yield bond experienced outflows for the fifth 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 now much higher, and not being able to write them off will adversely affect profitability.

On the active side, American Funds managed to stay positive with a $2.2 billion inflow (all its funds are active). The two funds with the largest inflows were American Funds EuroPacific Growth AEPGX and American Funds American Balanced ABALX.

On the other hand, Fidelity, T. Rowe Price, and Franklin Templeton continued to suffer outflows from their active funds. After two months of double-digit billion-dollar flows, State Street experienced an extreme $25.3 billion outflow driven by its flagship exchange-traded fund, SPDR S&P 500 SPY.

Float shrink: US firms continue to buy stock

Posted on March 22, 2018 by Kerry Pechter -

New stock buybacks have already totaled $226.6 billion in 2018, according to a TrimTabs Research release this week. The average daily volume of announced corporate buying (new cash takeovers plus new stock buybacks) has been $5.4 billion, not far below the record $5.8 billion daily in 2015.

New cash takeovers have totaled $48.1 billion, and they have would have been $136.9 billion had Broadcom’s bid for Qualcomm succeeded.

The $5.4 billion daily in announced corporate buying this year amounts to $1.35 trillion on an annualized basis. The latter amount equals 15% of the $8.99 trillion in pre-tax wages and salaries earned by all U.S. workers subject to income tax withholding in 2017 (assuming a blended tax rate of 27%).

“We doubt companies will be using anywhere near $1.35 trillion to hire or boost compensation this year. Like the Federal Reserve’s monetary policy, the federal government’s tax policy has become a major driver of inequality,” the release said.

“If corporate actions early this year are any indication, far more of the savings from the corporate tax cut is likely to find its way into mergers and stock buybacks than into new jobs and fatter worker paychecks.”

Less debt for near-elderly households: EBRI

Posted on March 22, 2018 by Editorial Staff -

The debt levels of households with a “near-elderly” head of household—i.e., someone 55 to 64 years old—have improved since the Great Recession, according to a review of the Federal Reserve’s Survey of Consumer Finances (SCF) by the Employee Benefit Research Institute (EBRI).

But this group still carries more debt, on average, than families headed by people 65 or older, the EBRI said in a new issue brief.

“As with many of the families with elderly heads (those ages 65 or older) examined in the SCF, the families with a near-elderly head show a pattern of stubbornly higher indebtedness than in past generations—specifically those in the 1990s,” the EBRI said. The non-partisan research group found that:

More than three-quarters of families with a near-elderly head held debt in 2016 (77.1%). While this level represents a downward trend from 81.7% in 2007, it remains higher than the proportion in 1992 (71.4%). The family head age cohort with the next highest percentage with debt were families with heads ages 65-74, where the percentage with debt ranged from 51.5% in 1992 to 70.1% in 2016.
As with families with elderly heads, the families with near-elderly heads have seen their debt levels decline as a percent of their assets since 2010—from 10.7% to 8.4% in 2016.
Total debt payments as a percentage of income of families with near-elderly heads has been trending down since 2007. It is at its lowest level since 1992, at 9.1% in 2016. However, this level is still higher than that of families with older heads, which range from 6.0% to 7.9%.

The proportion of families with a near-elderly head with debt payments that are greater than 40% of their income is also down substantially since 2007 (8.5% in 2016 vs. 12.5% in 2007). This cohort is more likely to have debt payments in excess of 40% of income than family cohorts with older heads, however.

41% of families with heads ages 55-64 had credit card debt in 2016. That’s well below the peak level of 50% in 2007 but higher than in 1992, when it was 37%.
The median credit debt for families with heads ages 55-64 decreased significantly in 2016 from $4,168 in 2007 to $2,800 in 2016. However, this is still higher than the 1992 level of $1,676, and higher than for families with heads ages 65 or older.

The EBRI report, “Debt of the Elderly and Near Elderly, 1992–2016” is published as the March 2018 EBRI Issue Brief, and is available online.

Need for annuities is strong but interest still weak: Survey

Posted on March 22, 2018 by Editorial Staff -

Almost three out four Americans (73%) consider guaranteed income “a highly valuable addition to Social Security,” according to a survey of 1,003 pre-retirees and retirees aged 55-75 with more than $100,000 in household assets was fielded in February 2018. A year ago, only 61% of those surveyed expressed that opinion.

That is among the conclusions reached in the fourth annual Guaranteed Lifetime Income Study from Greenwald & Associates and CANNEX.

More than half of those surveyed (54%) were worried about their ability to pay for long-term health care or nursing home expenses and 52% worried about losing some of their retirement savings in a market downturn. Slightly fewer (46%) are worried about outliving their savings.

“The less affluent and women, in particular, are concerned about their ability to meet their needs if they live beyond this. Other research has shown that more than half will wind up living longer than they expect,” said study director Doug Kincaid of Greenwald & Associates, in a release.

The survey showed that 43% of respondents with assets between $100,000-$249,000 are “highly concerned” about meeting their financial needs in retirement, compared to just 17% of those with more than $1,000,000 in assets.

More individuals without pension income (38% to 25%) are “highly concerned” about outliving their retirement savings than are individuals with pensions (a population that is declining). Women are more likely to be highly concerned about outliving their assets than men (37% to 22%).

The study showed, however, that almost 8 in 10 are confidence to some degree in their ability to maintain their lifestyle in retirement until age 85. About half of respondents (53%) expressed a high degree of confidence.

Those in the lower asset group ($100,000-$249,000) are much less likely to be highly confident about maintaining their lifestyles than those with more than $1 million, by 43% to 74%. But only 38% were highly confident that they could maintain their current lifestyle to age 90 and only 31% were highly confident that they could do so until age 95.

Respondents expected their income to decline when they retire, but many don’t expect their income to change much during their retirement. Around four in 10 pre-retirees said they expect to receive annual income of less than $50,000; 23% expect $50,000 to $75,000 and 16% expect $75,000 to $99,000. Less than 20% expect more than $100,000 in retirement income.

About four in 10 (38%) expect their expenses to be highest in late retirement and 25% expect their expenses to be higher in early retirement; 15% expect their expenses to be highest in the second 10 years of retirement. Around one in five were not sure when expenses would be highest.

Many retirees have bullish expectations of asset growth during early retirement. More than half (53%) of respondents ages 65 to 69 believe the value of their assets will be higher in 10 years, as do 48% of those ages 70 to 75. Only 19% and 13%, respectively, believe their assets will be lower in value.

“Respondents are optimistic that market growth in their savings, along with a lower level of expenses, will enable them to maintain their quality of life in retirement,” said Gary Baker, president of CANNEX USA.

But, “given limited savings and rising costs, drawing down assets will be a necessity for most retirees, making the risk of running out of funds a question of time without lifetime income strategies,” he added.

In their evaluation of guaranteed lifetime income products, two thirds of respondents rated the benefit of protection against longevity risk, peace of mind, and making it easier to budget, as positives. Understandability, access and too many terms & conditions were the top negatives. The evaluation of the positives of these products rose year-over-year, while negative evaluations remained the same.

Consistent with data from prior years, financial advisors are the most common source of information about annuities with 39% of respondents saying they heard about the product from advisors. Twenty-three percent of respondents said they heard about annuities from financial institutions.

Seventy percent of respondents said they believe that financial advisors should discuss guaranteed lifetime income to meet their retirement needs; if they do not, many would consider changing advisor relationships. Two-thirds of the advised said they are “highly satisfied” with the financial advice they receive, but satisfaction was even higher if retirement income strategies were discussed. Only half of those currently working with an advisor said they’d had a conversation about retirement income strategies, however.

Although clients have mostly heard positive commentary about guaranteed lifetime income products and annuities from advisors and financial institutions, the messages they receive are mixed. About 60% of advisors were reported to have been positive about annuities, but 37% were either neutral or negative. Respondents said that most of what they read or hear from the media about annuities is either neutral or negative.

When the word “annuity” was used instead of “guaranteed income product,” a third of respondents expressed lower interest in the same product. When guaranteed income products are framed in the context of covering essential expenses, their perceived importance rose, particularly among women.

“There are significant operational challenges the financial services industry still needs to overcome to broaden access to annuities, in addition to addressing negative perceptions around them,” Baker said.

Among those who report owning a guaranteed lifetime income product, 63% reported being highly satisfied with the purchase. “Peace of mind” was the most cited benefit. About three-quarters (73%) said the product is highly important to their financial security.

Those who purchased these products tend to be more risk averse than their counterparts, the survey showed. Women rate the importance of having guaranteed lifetime income significantly higher than men at all stages of retirement.

Hold the Parade

Posted on March 22, 2018 by Kerry Pechter -

The indexed and variable annuity industries celebrated this week when a federal appeals panel in the Fifth District ruled that the Obama administration’s Department of Labor overstepped its authority by applying the standard of conduct for retirement plan fiduciaries to people who sell annuities to IRA owners (especially rollover IRA owners).

The annuity industry certainly needed some good news this week.

LIMRA Secure Retirement Institute and Wink’s Sales & Market Report both released figures showing that, despite a demographic tailwind and a strong economy, sales of indexed and variable annuities are at their lowest levels in years—thanks to depressed interest rates and regulatory uncertainty.

In the Fifth District, Circuit Judge Edith H. Jones effectively rejected the Obama Administration’s end-around gambit. The Obama DOL in 2010 through 2016 knew that it couldn’t use the conventional legislative route to fix a perceived problem—conflicts of interest created by payments from manufacturers of annuities to financial advisors who sell their annuities to rollover IRA clients. A hostile Congress blocked the way.

So the Obama administration attempted to change DOL regulations instead and create the now-famous fiduciary rule. Things turned especially ugly when, with little or no warning, the final version of the rule made it harder to sell indexed annuities. (Indeed, indexed annuity sales fell year-over-year in 2017 for the first time in a decade.) Suits by the American Council of Life Insurers (ACLI), the National Association of Insurance and Financial Advisors (NAIFA) and others soon followed.

In the conservative Fifth District federal appeals court, based in New Orleans, Judge Jones reversed district court rulings and said the DOL overstepped its bounds by creating the new rule. (In her opinion, she seemed to mock the DOL’s legal arguments as well, but maybe I imagined that.)

If Jones’ ruling goes unchallenged, and if other circuits yield to its authority, then manufacturers and distributors of indexed and variable annuities have defused a time-bomb. The plaintiff’s lawsuits that the fiduciary rule was bound to trigger might have inflicted even more damage on the existing annuity distribution model than fiduciary class action lawsuits inflicted on the model for distributing mutual funds through 401(k) plans a few years ago.

But will the Fifth District ruling become the law of the land? We asked the legal experts. There’s no consensus regarding what happens next.

The ACLI, a plaintiff in the Fifth District case, said this week that the Jones ruling is the last word on the fiduciary rule.

“The effect of the ruling is to vacate the rule, and that’s a nationwide vacatur,” said a spokesperson for the ACLI, quoting ACLI attorney David Ogden of the firm Wilmer Hale. “The function of an APA [Administrative Procedures Act] vacatur is to take the rule and invalidate it. It’s not a circuit-specific ruling, but a national ruling.”

ERISA expert Marcia Wagner, of the Boston-based Wagner Law Group, wasn’t so sure. “There is a ‘circuit split,’ which means this will likely go to the Supreme Court,” she told RIJ, using the term of art that refers to fundamental disagreements between two federal appellate courts. “The Fifth Circuit speaks only for the fifth circuit even if it is attempting to speak for more. The circuit courts are notoriously independent of each other.”

Micah Hauptmann of the liberal Consumer Federation of America, told RIJ, “I think both [Ogden and Wagner] are wrong. First, the Fifth Circuit could rehear it en banc [before the entire panel of judges]; second, there’s still a case pending before the DC Circuit. If that court issues an opinion upholding the rule, that would create a clear split, and then it’s possible that the Supreme Court could take it up. I know ACLI would like this rule to go away everywhere and for all time, but it’s not a done deal yet.”

Chris Caruso, the attorney, portfolio manager and journalist, said this in a broadcast email: “The ruling is of limited jurisdiction and doesn’t impact what the Tenth Circuit said two days earlier or the Massachusetts case against Scottrade [now TD Ameritrade].”

Caruso was hopeful that a productive resolution is forthcoming. “[The Jones ruling] also makes it easier for the DOL to justify amending the Rule—a process which it is currently reviewing. It will also embolden the Securities & Exchange Commission to go ahead with their plans to establish a fiduciary standard and it encourages the DOL to work with the SEC on this.”

Andrew Holly of the Minneapolis firm of Dorsey & Whitney, which represents financial services firms, said in an email:

“The Circuit Courts of Appeals are divided over the legality of the rule itself—creating even greater confusion. Because of this confusion, it is very likely that either the Supreme Court (or the entire Fifth Circuit) will examine this issue to determine whether the rule is consistent with the DOL’s authority. Of course, all of this is moot if the DOL decides to revise or eliminate the entire rule.”

Attorneys at Drinker Biddle also weighed in this week with an email bulletin. “A number of commentators have suggested the DOL will not ask for a rehearing by the Fifth Circuit, or seek permission to appeal to the Supreme Court, and will let the Fiduciary Rule die,” the bulletin said.

“We believe there is a fair chance that the DOL will seek to have the decision overruled even as it continues its regulatory process to review and likely amend the rule.”

Here at RIJ, we don’t think Judge Jones understood exactly how the annuity business works today.

The judge seemed to equate the transparent and trivial commissions that users of discount brokerage trading platforms pay with something quite different: the undisclosed four- or five-figure commissions that insurance companies pay to intermediaries on the sale of B-share annuities or indexed annuities.

Jones also seemed unaware that insurance agents and investment advisors at brokerages can and do position themselves as trusted advisors. Indeed, certain advisor groups have defended commissions on the grounds that they help cover the costs of financial advice over the long-term for middle-class clients who can’t afford a fee-based advisor. If you count district court decisions and the dissenting opinion of the Fifth District’s own chief judge, Jones’ view is in the minority.

So, even the legal experts don’t know exactly what will happen next. But who could have guessed that in 2018 the annuity regulatory environment would be even more volatile than the equities markets?

Chart: U.S. Individual Annuity Sales, Year-End 2017 (LIMRA SRI)

Posted on March 22, 2018 by Kerry Pechter -

Hueler adds new offering to its Income Solutions platform

Posted on March 22, 2018 by Editorial Staff -

Hueler Companies has enhanced its Income Solutions platform with a new service for defined contribution plans that include a “Qualified Plan Distributed Annuity” (QPDA) as a normal form of distribution.

Employers who have one or more defined contribution plans with an annuity as a normal form of distribution, often referred to as a Qualified Joint and Survivor Annuity (QJSA) option, will be able to facilitate qualified annuity quotes and purchasing for participants covered under the plan.

Kelli Hueler, CEO of Hueler Companies, called the enhancement “long overdue” for “plan sponsors seeking a prudent process for meeting their fiduciary duties related to a QPDA option.” The enhancement applies to in-plan and out-of-plan distribution options.

The enhancement gives plan sponsors access to a group of life insurers that submit competitive bids in response to participant requests for annuity quotes. Plan participants can review quotes from multiple insurers based upon the annuity distribution options offered by their plan.

Hueler Companies was founded in 1987 as a consulting/data research firm offering resources for the analysis, selection and implementation of stable value and annuity products. In 2004 Hueler launched Income Solutions platform, a web‐based lifetime income annuity purchase system. The platform is available to individual investors through Hueler Companies’ non‐exclusive partnerships with financial service firms, 401(k) providers, and advisor networks.

In Canada, ‘LIFE’ Begins at 85

Posted on March 22, 2018 by Kerry Pechter -

Retirement income aficionados have been studying two fresh ideas for reducing the cost of retirement: Tontines and longevity insurance. Both concepts are active ingredients in the LIFE (Lifetime Income for the Elderly) idea recently proposed by Canadian economist Bonnie-Jeanne MacDonald.

MacDonald, who was a guest speaker at the Defined Contribution Institutional Investors Association Conference in New York last fall, described LIFE in an essay published in January by the Toronto-based C.D. Howe Institute, which is dedicated to “economically sound” public policies that can raise living standards.

LIFE would involve a collective, government-run but professionally managed investment fund. At age 65, people could invest part of their retirement savings in an investment pool. Twenty years later, at age 85, they would begin receiving an income for life. Each person’s income would be based on their contribution, the mortality rates of the pool’s members, and the pool’s earnings.

Though MacDonald doesn’t necessarily call it that, LIFE is a tontine, in which participants bear both all of the investment and longevity risk. No life insurer provides a guarantee, and there’s the rub. Life insurers, seeing a threat, might lobby against it. Free-marketers will oppose anything that’s government-run. And if the funds aren’t liquid, a lot of people might not participate.

But if private companies don’t act, governments may need to create some sort of affordable old-old-age insurance. A public, late-life tontine would cost less (and presumably sell faster) than advisor-sold annuities. It could lighten the potential burden on taxpayers of caring for the very old. For retirees, it would reduce the need to hoard savings against the risk of living too long.

‘Three ideas came together’

In 2009, MacDonald began researching the question of salary replacement rates. That led her to conclude that the long-standing rule of thumb about income replacement rates in retirement—70% of final salary—doesn’t apply to everybody. (Her presentation to DCIAA last fall was on that topic.) Then she began looking at methods of spending savings in retirement.

“I found out that people don’t want to buy annuities from financial service companies. The insurance companies themselves realize the risk of people living longer than expected, and have changed their pricing to account for it. I talked to Keith Ambachtsheer [the Canadian pension expert, emeritus professor at the University of Toronto, and now pension consultant].

“Eventually three ideas started to come together,” she said. “The tontine is one part of it. It’s the ‘pooled risk’ side,” she said. “Then there’s the nationalized aspect, and then the deferred income aspect. It’s those three things together. There are no fixed fees or generational risk transfer,” where a younger generation has to cover a shortfall in saving by an older generation.

All three concepts would in theory lower the individual and social costs of longevity insurance. A tontine is basically an annuity whose payout is determined entirely by the returns of an investment pool and the death rate of the investors. Because it’s not guaranteed, it requires no life insurer to issue it. So it doesn’t involve the expensive hedging, reserves, actuarial work that are sine qua non for guarantees, or the profit requirements that private companies require.

Reducing costs

MacDonald hasn’t worked out all the details of the LIFE program, but she has created an outline for it. “If you throw in too much detail [at this point], people will say, ‘It’s too complicated.’ She put the idea out there at a level that’s readable and understandable,” Ambachtsheer (left) told RIJ.

But, to keep costs down, the product would be intentionally simple. A one-size-fits-all approach makes for less flexibility, but she thinks uniformity will help reduce marketing costs and lack of liquidity riders will raise payouts. Collective funds would provide economies of scale that would reduce investment costs.

No more than two funds. “Originally I said, Let’s just have one fund. It would be volatile, and fluctuate with the markets,” MacDonald said. “There are ways you can do that and still smooth the outcomes at the personal level. Or you could have two funds, a risky fund and a safe fund. Someone might go into the program at age 65. Starting at age 65, and each year afterward, one-twentieth of their assets would move to the low-risk fund.”

A tight window for signing up. “There would be a single contribution and a window in which to contribute. You don’t want people delaying the decision indefinitely. That would make it really complicated. People who would have bought it at 65 might not buy it later, as their health changes. That’s my concern. The decision would be simple.”

Fixed income plus a bonus. “The monthly income would be fixed across their remaining life, calculated using conservative investment and mortality expectations. At the end of each year, any surplus in the mortality experience of the group and investment return on the accounts would be distributed equitably among the age 85+ members through lump sum ‘bonus’ payouts.”

No withdrawals, refunds or death benefits. “The problem with a private industry solution is that they would want to add options [to broaden the appeal and increase sales]. But adding options tends to lead to decision overload. I know that death benefits are popular in deferred income annuities, but the death benefit also makes the solution more expensive. Without the death benefit, people are paying a lot less for their income. It’s more like pure insurance.”

“A [insurer-issued] life annuity gets nicked for a whole lot of things,” Ambachtsheer said. “You have adverse selection issues; you have return on capital issues. If you can get rid of those layers, then you can get more money out the back end. But it’s a great idea on its own merits.”

Resonance overseas

Tontines may sound exotic, but plan sponsors, governments and pension consulting firms in the UK and Europe are currently studying the concept of distributing regular, stable but non-guaranteed income from a collective investment fund as a compromise between defined benefit plans (which put sponsors at high longevity risk) and US-style defined contribution plans (which put participants at high longevity risk).

Per Linnemann, a former chief actuary of Denmark, has developed a product, called iTDFs, based on an algorithm that would smooth the variable payouts from individual accounts within a collectively-managed investment pool. As an option in an employer-sponsored plan, iTDFs would offer a seamless transition from accumulation to decumulation.

Unlike MacDonald’s LIFE product, which offers no liquidity at all during the deferral period, Linnemann’s model would allow individuals to access the money in their accounts during retirement.

“The iTDFs framework can also provide solutions where it is possible for the retiree to maintain flexibility and control of the all of the savings from age 65 to age 84 combined seamlessly with a longevity-pooling phase from age 85,” Linnemann (left) told RIJ.

Pros and cons

There are pros and cons to a program like LIFE. On the plus side: Any advanced-life deferred income annuity (DIA), including those currently issued by about a dozen insurers in the US, prevents hoarding of savings, simplifies the retirement income planning process to a finite block of years (say, 65 to 85), and creates a reserve against long-term care costs.

On the anti-hoarding effect, Ambachtsheer said, “Why not create certainty at the back end so that you don’t have people withdrawing as little as possible during retirement just in case they might need the money later.” Perhaps counter-intuitively, retirees spend more [between the ages of 65 and 85] if they parked 20% of their savings in a deferring income annuity.

A national DIA could also help take some pressure off of public service providers (and taxpayers). “Each province in Canada has its own long-term care program,” said MacDonald. “People who think deeply about these things realize that we’ll have a huge elderly population (over age 85) in the provinces going forward and this is going to be very expensive from a health care cost perspective.” The same holds true for Medicaid in the US.

But should government run a tontine? Moshe Milevsky (left), the York University finance professor and acknowledged tontine expert questioned the LIFE program on at least two counts: government control and lack of detail.

“On the one hand, I’m delighted to see yet another credible author and study arguing in favor of introducing a retirement income tontine scheme in Canada—even if she doesn’t call it a tontine,” he told RIJ in an email. “I’m in favor of anything that generates dialogue and interest in this important space.

“That said, her article doesn’t really have any actuarial, financial or pricing information, which makes it hard to evaluate to a quant like myself. I was hoping and expecting to see more details, even if it was relegated to an appendix.”

Milevsky, who has published two recent books on the history of tontines, is not ready to take it on faith that tontines would be cheaper than annuities. “From a consumer perspective, how would the payout compare to annuity payouts? Really, the Devil is in the detail—which is missing,” he said. [For Milevsky’s latest comparison of annuity and tontine payout rates, see [the article] in today’s issue of RIJ.

“I would also like to play Devil’s advocate and ask: Why Government?,” he said. “Why set-up a new entity and potential bureaucracy for this? And if government is getting involved, why not expand the Canadian Pension Plan (CPP, similar to US Social Security) and allow Canadians to buy additional annuity income at retirement? Why not encourage and make it easier for private insurance companies to offer them instead?”

Ambachtsheer suggests that insurers have purposely gone in another direction—toward complexity. “I have gone to the insurance industry and asked them, ‘Why don’t you jump on this idea?’ People are not buying life annuities anyway. To me, part of the problem is this convolution with life annuities where they are part investment product and part longevity product. You’re better off separating the two.”

Wink CEO Sheryl Moore comments on 2017 dip in annuity sales

Posted on March 22, 2018 by Editorial Staff -

Total sales of non-variable deferred annuity sales exceeded $21.1 billion in the fourth quarter of 2017, up 4.2% from the previous quarter and up 0.5% from the same period last year. But total non-variable deferred annuity sales for all of 2017 were down 9.1% from 2016, at $87.9 billion.

Those results were reported in Wink’s Sales & Market Report for fourth quarter, 2017, published by Des Moines, Iowa-based Wink, Inc. Fifty-eight indexed annuity providers, 52 fixed annuity providers, and 60 MYGA (multi-year guarantee annuities) issuers participated in the 82nd edition of the quarterly report.

AIG ranked first in total sales of non-variable deferred annuities, with an 8.5% share of the market. Allianz Life, American Equity Companies, Global Atlantic Financial Group, and New York Life followed. Allianz Life’s Allianz 222 indexed annuity was the top-selling non-variable deferred annuity overall for all distribution channels.

Indexed annuity sales for the fourth quarter were $13.6 billion; up 6.4% from the previous quarter and up 2.3% from the same period last year. Total indexed annuity sales for 2017 were $53.9 billion, a decline of 7.1% from the year prior.

“This is the first time that annual sales of indexed annuity sales have declined in a decade,” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc., in a release. “A seven-percent loss in sales is an unmanageable hurdle, given the challenges the DOL’s rule had presented.”

“Although the DOL’s fiduciary rule is in the rearview mirror, some form of fiduciary standard is likely here to stay,” Moore said. “The good news is that annuity sales won’t likely be dramatically affected by this in 2018, as distribution has already been adapting their products, processes, procedures, forms, and more.”

Allianz Life was again the top-seller of indexed annuities, with a market share of 12.3%. Athene USA, Nationwide, American Equity Companies, and AIG followed. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the 14th consecutive quarter.

Sales of traditional fixed annuity in the fourth quarter were $755.0 million; down 4.8% from the previous quarter, and down 27.1% from the same period last year. Total traditional fixed annuity sales for 2017 declined 28.6%, to $3.6 billion. Traditional fixed annuities have a one-year guaranteed fixed rate.

Despite the fact that Jackson National Life was ranked 20th in sales of fixed-rate annuites for 2017, it was ranked first in sales of fixed annuities for the fourth quarter, with a market share of 17.1%. Modern Woodmen of America, Global Atlantic Financial Group, Great American Insurance Group, and EquiTrust followed. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity for the quarter, for all channels combined.

Multi-year guaranteed annuity sales in the fourth quarter were $6.7 billion; up 1.2% from the previous quarter and up 1.3% from same period last year. Total MYGA sales for 2017 were $30.3 billion, a decline of 9.5%. A MYGA has a fixed rate that is guaranteed for more than one year.

New York Life was the top seller of MYG annuity sales, with a market share of 19.7%. AIG, Global Atlantic Financial Group, Massachusetts Mutual Life Companies, and Security Benefit Life followed. Forethought’s SecureFore 3 Fixed Annuity was the #1 selling multi-year guaranteed annuity for the quarter, for all channels combined.

Wink said it expects to begin reporting on immediate annuity and variable annuity product sales in the future. This year it will begin requesting and reporting sales of indexed variable annuities (structured variable annuities, collared variable annuities, and buffered variable annuities), the release said.

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.

‘Three ideas came together’

Reducing costs

Resonance overseas

Pros and cons

Data Connection

Lists*