Archives: Articles

IssueM Articles

Poland unveils retirement system overhaul

Posted on February 22, 2018 by -

Poland prime minister Mateusz Morawiecki, elected just last December, has released draft legislation to overhaul the nation’s retirement system. Morawiecki first proposed a new kind of employee pension plan (“PPK” or Employee Capital Plan) two years ago when he was Poland’s economic development minister.

Under the proposal, employers (except those companies with an existing employer-paid pension with a minimum total contribution of 3.5%) would be obligated to contribute at least 2% of pay to employee accounts, with an option to contribute 2% more.

Employees would contribute at least 1.5% but no more than 2.5%. As planned, the PPKs will be voluntary for employees. Workers ages 55 years and younger will have three months to opt out of the proposed auto-enrollment system. Older workers, of up to 70 years, will have to opt in.

Poland’s pension system has three so-called “pillars.” The first pillar is the state pension, ZUS, which corresponds to our Social Security. The second pillar consists of mandatory defined contribution plans funded by part of the ZUS tax, with investments in “open pension funds” called OFEs run by private banks, insurers, and asset managers. A third pillar consists of Occupational Pension Funds (PPEs) that employers could set up voluntarily. The new PPKs would replace the second (OFE) pillar plans.

One point of controversy: The proposal excludes private banks, insurers and asset managers that have been running OFEs from managing any of the plan assets. Asset management will be restricted to Polish investment fund companies (TFIs) registered for at least three years, and coordinated by the state-run Polish Development Fund. The Fund, which also runs a TFI, will administer the PPK portal.

The proposal is intended to address a retirement savings crisis in Poland that the OFEs and PPEs couldn’t solve. Many Polish workers stopped directing part of their ZUS contributions to the OFEs. Only about 400,000 workers were covered by PPEs (Poland has a population of 38 million). PPE assets were just 0.10% of GDP.

The PPK plan aims to use auto-enrollment bring 11.4 million workers (75% of the working population) into employer-based pension plans over the next two year and to bring pension assets closer to the average among EU countries of 24% of GDP, according to the European Insurance and Occupational Pensions Authority (EIOPA).

The government will add PLN240 (€58) per year to each individual account, along with a one-off welcome bonus of PLN250 after three months of enrolment, until the end of 2020. The program will be implemented in six-month stages, starting in January 2019.

The first stage will involve companies with more than 250 employees, a group that will encompass about 3.3 million people. The final stage, scheduled for July 2020, will cover companies with between one and 19 workers, as well as budget-financed entities such as state schools. This last category includes about 5.1 million of the total projected 11.4 million workers covered.

The draft caps annual management fees at 0.50% of net assets, with a further 0.10% allowed as a performance fee. To prevent market concentration, any investment fund company (including its subsidiaries) with PPK assets exceeding 15% of the market total will not receive any fees on the excess.

© 2018 RIJ Publishing LLC. All rights reserved.

Principal’s Mexico retirement business acquires MetLife’s

Posted on February 22, 2018 by -

Principal Financial Group has completed its acquisition of MetLife, Inc.’s pension fund management business in Mexico, Afore, S.A. de C.V., attaining full regulatory approval for the deal, the insurance and retirement firm said this week.

Afore is an acronym that in Mexico stands for Administrator of Funds for Retirement. After merging MetLife’s Afore with Principal’s, Principal Afore, S.A. de C.V. will be Mexico’s fifth largest Afore, with a more than seven percent market share.

After the purchase, Principal in Mexico will manage around 3.4 million individual accounts for retirement with the equivalent of US$12.3 billion of assets under management at the current exchange rate of Mex$18.65 to US$1.

“Mexico is a growing and important market for Principal,” said Luis Valdes, president of Principal International, the global pension business of Principal Financial Group, in a release. Unless MetLife Afore clients request a transfer of their individual accounts to another Afore, they will become clients of Principal Afore over the next 90 days.

© 2018 RIJ Publishing LLC. All rights reserved.

Western & Southern reports $337 million in PRT business

Posted on February 22, 2018 by -

Western & Southern Financial Group, Inc., generated more than $337 million in pension risk transfer (PRT) premium in 2017, up from $15 million in premium in 2015 and 2016 combined.  

PRT is offered through Western & Southern’s institutional markets business unit. In September 2017, the business unit was established to expand Western & Southern capabilities with corporate and business clients.  The unit also offers bank-owned life insurance solutions and a cobranded direct-to-consumer digital insurance platform built specifically for banks, wealth management firms and finance companies.  The business unit is also evaluating opportunities to create retirement and protection solutions for small and medium-sized enterprises (SMEs).

Western & Southern serves pension risk transfer needs with a guaranteed single-premium group annuity called PensionAssist from subsidiary Western-Southern Life Assurance Company (Western & Southern Life). PensionAssist, launched in 2015, allows plan sponsors to replace pension benefits paid to pension participants with annuity payments from Western & Southern Life.

© 2018 RIJ Publishing LLC. All rights reserved.

Spain Looks for New Ways to Save

Posted on February 15, 2018 by -

“To go to America,” sighed the smartly dressed young assistant in a Sotheby’s real estate office on Plaza Nueva in Seville, Spain, where tourists from richer countries come to see flamenco, eat tapas and relax in the sun. “That is my dream. Everything here is work, work, work.”

Spain is still working its way out of its 2010-2011 financial crisis. Tourism (82 million people visited this nation of 45 million in 2017) has been a blessing but also a symptom of the country’s bargain prices—which stem from lingering unemployment and depressed wages.  

Because of those conditions, most Spaniards are too caught up in day-to-day financial worries to think much about the future. But, like the US, Spain is aging. And a retirement income crisis is coming. The Spanish government intends to all but eliminate future cost-of-living increases to the national pension, so future retirees will need other sources of savings to offset their reduced purchasing power.

Therein lies the tension. Spain’s defined contribution (aka “second pillar”) system is under-developed. That’s partly because so many Spaniards work in small independent businesses. In addition, payroll taxes are already high (employers pay 24% of pay) and the public pension replaces more than 80% of the €27,000 median salary. By 2050, however, the average replacement rate is expected to shrink to 50%.

“Not many private plans have been implemented in Spain, because the statutory scheme has been so good,” Rosa Di Capua, a Rosa Di Capuapartner at Mercer (right), told RIJ. “People don’t think private plans are necessary, but it’s clear that there will be a need them in the future.”

Similarities and differences

Spain has only 1,290 employer-sponsored retirement plans, according to Inverco, a pension trade group here. Only about 7% of Spanish workers are covered by such plans, according to the European Trade Union Institute. “Occupational pension schemes have very limited coverage in actuality. Almost only large-sized companies tend to provide occupational pension benefits (usually defined contribution schemes),” according to the ETUI.

The amount of money in private retirement savings plans is growing, however. In 2016, according to OECD (Organization of Economic Cooperation and Development) estimates, fund assets in Spain were $164.2 billion or 14% of GDP, up from US $116.4 billion, or 7.8% of GDP in 2011. (For comparison, private retirement savings are worth 72% of GDP in the US and 136% of GDP in the Netherlands).

Defined contribution “has not expanded because companies think that for us this is a new cost, an increase in salary cost. And it’s not something that unions are fighting for,” Di Capua said. “Also, salaries in the last decade have been so low due to the crisis, that deferring more of the salary isn’t realistic.”

“The second pillar is quite low,” said Diego Valero (below left), CEO of Novaster, a Spanish pension consultancy, in an interview with RIJ. “Not many companies have developed an occupational pension for their employees. Big companies or the multinational companies have some pension schemes. In Spain, 90% of the labor force works in medium and small companies, and most of them don’t have any complementary savings plans.”

If and when DC plans flower in Spain, they will be both similar and dissimilar to US-style DC. Like US plans, they will be tax-deferred, voluntary (Spain’s constitution forbids mandatory DC), employer-based, and open to lump sum, systematic or guaranteed distribution at retirement.

But DC in Spain would also have a European flavor. Spanish DC plans would be co-designed by unions and management. An employer match would likely be expected. There would be less liquidity: No counterpart to the rollover IRA exists in Spain, and only this month did the government begin allowing penalty-free, non-hardship access to qualified savings after a 10-year holding period.

One investment option for all  

Unlike DC plan participants in the US, Spain’s participants can’t build their own portfolios. “One of the huge differences between
Diego Riveradefined contribution in the US and Spain is in the investment policies,” Di Capua told RIJ. Aside from the fact that participants over age 50 must invest 100% in fixed income, all participants in Spanish DC plans  invest in the same collective fund. 

All of the money is managed by a single investment manager for all participants, with the fund manager typically working for one of the major banks, such as CaixaBank, BBVA or Santander. To break into the Spanish institutional market, a US asset manager like Vanguard or BlackRock would have to manage a tranche of that fund.

“Today the law makes it impossible to have a US or UK type plan where individuals can choose different strategies, mutual funds, and create their own personal portfolio,” said Alvaro Molina, (below right) director of institutional investments for Aon Hewitt in Spain.

So far only Endesa, the electrical and gas utility that is 70% owned by the Italian company ENEL, has looked to hire best-in-class fund managers on an a la carte basis, Molina said, and three or four other DC plans have target date funds. Unions tend to be leery of target date funds—union leaders think pension professionals can manage money better than rank-and-file workers.   

Winning hearts and minds

“We are trying to offer the market more possibilities for developing DC plans,” Novaster’s Valero told RIJ. “Otherwise the future looks terrible. I am a strong proponent of models like NEST in the UK; I like [Shlomo Benartzi’s] ‘Save More Tomorrow’ idea. We are trying to introduce principles of behavioral economics to the pension industry here. We’re trying help companies understand what this means, and how to set up an auto-enrollment scheme. This is our goal.

“Asset managers think the DC market will grow; the question is, ‘What is the best way to grow?’ Most of the industry thinks it’s necessary to increase tax incentives [for retirement savings]. But, from my point of view, that’s clearly not enough. We need other points of view to reach the companies.”Alvaro Molina

The government is not necessarily helping stimulate tax-deferred savings. It has reduced the limit on deductible contributions to retirement to the lower of €8,000 or 30% of earnings (reduced from €10,000) , compared to $18,000 ($24,000 for those over 50) in the US. Although new regulations also reduced the limit on average commissions on pension funds, a May 2017 press report said that investment costs are kept high in Spain by the handful of major banks that control most of the market.

“Everyone knows that the public pension’s average replacement rate will drop to 50% over the next 30 years, but there’s a present bias,” Valero told RIJ. “There are no new incentives by the government and no new models, so unfortunately we are in a very bad situation for the immediate future.”

One possibility that Aon Hewitt’s Molina suggested: Create an ad hoc DC plan by making it easy for workers to contribute to personal pensions through their payroll systems at work. Several Spanish banks offer IRA-type individual savings vehicles. Banco Mediolanum, for instance, offers a pension-supplement savings program and life insurance that can converts to a life annuity.  Investment options tend to be more flexible in these personal pensions than in DC plans.

© 2018 RIJ Publishing LLC. All rights reserved.

 

The Lessons of Black Monday

Posted on February 15, 2018 by -

US President Donald Trump has regularly pointed to the stock market as a source of validation of his administration’s economic program. But, while the Dow Jones Industrial Average (DJIA) has risen by roughly 30% since Trump’s inauguration, the extent to which the market’s rise was due to the president’s policies is uncertain. What is certain, as we have recently been reminded, is that what goes up can come down.

When interpreting sharp drops in stock prices and their impact, many will think back to 2008 and the market turbulence surrounding Lehman Brothers’ bankruptcy filing. But a better historical precedent for current conditions is Black Monday: October 19, 1987.

Black Monday was a big deal: the 22.6% price collapse is still the largest one-day percentage drop in the DJIA on record. The equivalent today would be – wait for it – 6,000 points on the Dow.

In addition, the 1987 crash occurred against the backdrop of monetary-policy tightening by the US Federal Reserve. Between January and October 1987, the Fed pushed up the effective federal funds rate by nearly 100 basis points, making it more expensive to borrow and purchase shares. In the run-up to October 2008, by contrast, interest rates fell sharply, reflecting a deteriorating economy. That is hardly the case now, of course, which makes 1987 the better analogy.

The 1987 crash also occurred in a period of dollar weakness. Late in the preceding week, Treasury Secretary James Baker made some remarks that were interpreted as a threat to devalue the dollar. Like current Treasury Secretary Steven Mnuchin at Davos this year, Baker could complain that his comments were taken out of context. But it is revealing that the sell-off on Black Monday began overseas, in countries likely to be adversely affected by a weak dollar, before spreading to the US.

Finally, algorithmic trading played a role. The algorithms in question, developed at the University of California, Berkeley, were known as “portfolio insurance.” Using computer modeling to optimize stock-to-cash ratios, portfolio insurance told investors to reduce the weight on stocks in falling markets as a way of limiting downside risk. These models thus encouraged investors to sell into a weak market, amplifying price swings.

Although the role of portfolio insurance is disputed, it’s hard to see how the market could have fallen by such a large amount without its influence. Twenty-first-century algorithmic trading may be more complex, but it, too, has unintended consequences, and it, too, can amplify volatility.

Despite all the drama on Wall Street in 1987, the impact on economic activity was muted. Consumer spending dropped sharply in October, owing to negative wealth effects and heightened uncertainty, but it quickly stabilized and recovered, while investment spending remained essentially unchanged.

What accounted for the limited fallout? First, the Fed, under its brand-new chairman, Alan Greenspan, loosened monetary policy, reassuring investors that the crash would not create serious liquidity problems. Market volatility declined, as did the associated uncertainty, buttressing consumer confidence.

Second, the crash did not destabilize systemically important financial institutions. The big money-center banks had used the five years since the outbreak of the Latin American debt crisis to strengthen their balance sheets. Although the Savings & Loan crisis continued to simmer, S&Ls were too small, even as a group, for their troubles to impact the economy significantly.

What, then, would be the effects of an analogous crash today? Currently, the US banking system looks sufficiently robust to absorb the strain. But we know that banks that are healthy when the market is rising can quickly fall sick when it reverses. Congressional moves to weaken the Dodd-Frank Act, relieving many banks of the requirement to undergo regular stress testing, suggest that this robust health shouldn’t be taken for granted.

Moreover, there is less room to cut interest rates today than in 1987, when the fed funds rate exceeded 6% and the prime rate charged by big banks was above 9%. To be sure, if the market fell sharply, the Fed would activate the “Greenspan-Bernanke Put,” providing large amounts of liquidity to distressed intermediaries. But whether Jay Powell’s Fed would respond as creatively as Bernanke’s in 2008 – providing “back-to-back” loans to non-member banks in distress, for example – is an open question.

Much will hinge, finally, on the president’s reaction. Will Trump respond like FDR in 1933, reassuring the public that the only thing we have to fear is fear itself? Or will he look for someone to blame for the collapse in his favorite economic indicator and lash out at the Democrats, foreign governments, and the Fed? A president who plays the blame game would only further aggravate the problem.

Barry Eichengreen is professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is Hall of Mirrors: The Great Depression, the Great Recession, and the Uses – and Misuses – of History.

© 2018 Project Syndicate.

Two ‘Santas’ Can Be Worse Than One

Posted on February 15, 2018 by -

Politicians love to claim that they have given us something. “We want to give you, the American people, a giant tax cut for Christmas. And when I say giant, I mean giant.” So proclaimed President Trump, with words echoed by many Congressional leaders.

There were only two problems with the statement. The tax cut wasn’t giant and the President and Congress didn’t give us anything

Not that Republicans stand alone in their claims of generosity. Democrats claimed they gave millions of Americans health insurance when they passed the 2010 Affordable Care Act. But while Congress and the President credit themselves for giving us something, they really are transferring public resources to some of us from others. In aggregate and over time, we must pay for anything they claim to give.

I find it easiest to divide the two sides of the balance sheet required for new legislation into giveaways and takeaways. Giveaways generally come in the form of tax cuts and spending increases, takeaways in the form of spending cuts and tax increases. Just as sources of funds must equal uses of funds for the budget as a whole, so also for new legislation must the sum of new giveaways be balanced by new takeaways.

Of course, some of the takeaways can be deferred through borrowing. Politicians never count those costs when announcing the amount they claim to have given us.

In a 1976 column in the journal National Observer, entitled “Taxes and the Two Santa Claus Theory,” conservative columnist and editor Jude Wanniski argued that Republicans needed be the party of tax cuts the way he asserted that Democrats played Santa Claus when they increased spending for social programs or passed redistributionist tax legislation.

At that time, Republicans had long been a minority party, particularly in the House of Representatives. Wanniski argued that they would never gain power as long as they simply opposed Santa-like spending increases or promoted raising taxes to pay for them.
In some ways, he got what he wanted. In the first years of the Republican presidencies of Ronald Reagan, George W. Bush, and Donald Trump, Congress passed tax cuts. Trump’s description of the Tax Cuts and Jobs Act (TCJA) as a Christmas gift lends full credence to the belief that political parties try to retain power by acting as Santa.

What Wanniski hadn’t fully anticipated was how far we have gone toward having two Santas acting at the same time, with scheduled spending increases being matched by new tax cuts that make the whole federal fiscal system increasingly unsustainable.
I’m not arguing the relative merits of tax cuts versus new spending. Government can—and should—shift resources in ways it believes will provide a future return to society. But that is different from saying that the money is free, like a gift from Santa.

For instance, Republicans believe shifting resources to business in the form of tax cuts in the TCJA will generate an economic return just as families believe they would generate a return by shifting money to pay for their children’s education. But neither Congress nor families can claim that the transaction is free, just because the money came from additional borrowing on our public or family credit card.

While both government and personal debt tempt us to live for today, only with government debt can Santa leave an IOU for Americans not yet identified and in some cases not yet born. The two competing Santas explain better than anything why borrowing in the U.S. has increased extraordinarily in recent decades, continually rising to new all-time highs outside of a World War II peak that was scheduled to decline quickly once war spending ended.

While analysts at the Tax Policy Center and Joint Committee on Taxation can determine which income and other classes will be affected by specified changes in the law—for instance, who benefits from higher child tax credits—they can’t identify the future losers. Thus, the distributional tables, just like claims that our elected officials have given us something, are often incomplete and in some ways misleading.

While these analysts can and do at times examine implications such as how tax cuts or spending increases might eventually be financed, those analyses get much less press attention than the explicit listing of today’s known “winners” and “losers.” The damage to good budget policy is obvious. It will always have trouble getting traction as long as we fail to recognize that we, not the President or Congress, are the ones who pay for what they claim to give away.

© 2018 The Urban Institute. This column previously appeared in TaxVox.

A.M. Best gives life/annuity industry a “negative outlook”

Posted on February 15, 2018 by -

A new report from A.M. Best contains good news and bad news for the U.S. life/annuity industry.

The good news: The industry in 2017 had strong balance sheets, solid earnings, focused business profiles and ongoing enhancements to enterprise risk management programs, according to A.M. Best’s U.S. Life/Annuity: 2018 Review & Preview report.

More good news: The industry’s statutory pretax operating earnings totaled $48.3 billion through third-quarter 2017, up from $32.2 billion in the same period in 2016. Reinsurance activity was high in both periods. Capital and surplus grew by $19.4 billion since the start of 2017, to $414.7 billion through third-quarter, the report said.

The bad news: The industry “remains plagued by macroeconomic and regulatory factors” as well as “lackluster sales, rapidly evolving technological requirements and changing consumer preferences and behavior.”

A.M. Best also found that the L/A industry lags technologically and recommended upgrades. “Such moves go directly against an industry that is characterized as being plodding and slow; however, the industry remains hamstrung by too many antiquated front- and back-end systems, which makes leveraging the significant amount of data many carriers have already amassed difficult,” the report said.  

A.M. Best is therefore maintaining a negative outlook on the L/A industry for 2018. “Sales of mainstream L/A products continued to struggle in 2017 and may be challenged in the coming year as well,” the ratings agency said. According to the report, sales of individual annuities, which account for over a quarter of total L/A direct premiums written (DPW), fell to $203.1 billion in 2016 from $213.2 in the previous year, and at third-quarter 2017, stood at $140.0 billion.

A tailwind from rate hikes?

Anticipated interest rate hikes in 2018 may create a tailwind for insurers if it leads to an eventual steepening of the treasury yield curve, which may make fixed annuities more attractive and allow insurers to attain more favorable interest rate spreads.

“Capitalization has been qualitatively diminished by the ongoing use of captives, permitted practices, surplus note issuance and other forms of redundant financing, although at the holding company level, financial flexibility and liquidity remain sound.”

Although the industry saw some upward movement in interest rates in 2017, generally low inflation and strong global economic metrics kept the longer end of the 10-year yield curve relatively flat. That put pressure on companies selling universal life and fixed annuity products, which have more interest-sensitive profiles.

A.M. Best expects another challenging year for insurers seeking higher asset yields to maintain operating profitability and manage spread compression. Potential exists for increased economic and regulatory volatility, such as a correction in the equity and credit markets.

Insurers’ focus will remain on core fixed income, private placements and collateralized mortgage loans. Because many L/A carriers have strong credit expertise, investing in collateralized loan obligations also likely will remain popular, the report said.

© 2018 RIJ Publishing LLC. All rights reserved.

Interest outpaces adoption of digital advice: Cerulli

Posted on February 15, 2018 by -

Investors’ interest in using digital advice platforms has grown since 2015, but interest has not been matched by actual adoption, according to Cerulli Associates, the global research and consulting firm.

“Cerulli initially examined the growth prospects of the digital financial advice market in 2015 and found a clear inverse relationship between an investor’s age and their willingness to engage with purely digital platforms,” said Scott Smith, director at Cerulli, in a release.

 “As of 3Q 2017, there is greater openness to digital advice relationships, but a strongly negative correlation between age and interest remains.” Investors ages 30-39 exhibited the greatest enthusiasm, with interest steadily declining among those ages 70 and older.

But people $2 million or more to invest also like digital advice. “Higher-net-worth investors are more aggressive in adding to their total number of advisory relationships, including digital, as a form of provider diversification,” Cerulli said.

“More than one-quarter of investors over 70, with $2 million to $5 million in investable assets, would consider online-only engagement,” the release said. “Providers should consider incorporating digital platform features that address the concerns of those approaching, or in, retirement.”

But even investors who like online only engagement will often seek the advice of a traditional human advisor, so advisors should develop platforms that can integrate digital and human advice, Cerulli said.

Cerulli’s first quarter 2018 issue of The Cerulli Edge – U.S. Retail Investor Edition articulates the digital advice market by separating investor households into “Online Enthusiasts,” who want a purely digital advisory relationship, or “Traditionalists,” who prefer a human advisor.  

© 2018 RIJ Publishing LLC. All rights reserved.

ETF traders dumped U.S. equities but not global: TrimTabs

Posted on February 15, 2018 by -

“Volatility returned with a vengeance just days after the global elite toasted buoyant markets and strengthening economies in Davos. The flows of U.S. equity funds and global equity funds diverged dramatically amid the mayhem,” said a media alert from TrimTabs this week.

“Contrarians should consider favoring U.S. equities over non-U.S. equities now,” the alert from the Los Angeles-based investment research firm said.

U.S. equity ETFs were dumped at a record pace. U.S. equity ETFs had outflows on each of the first six trading days of February totaling $29.7 billion (1.5% of assets). The six-day outflow surpassed the previous record of $24.4 billion (2.7% of assets) in February 2014.

But global equity ETFs were not sold amid the carnage, issuing $1.3 billion (0.2% of assets) in February. These funds suffered no selling even though they plunged 8.2%, nearly as much as the 9.0% decline of their U.S.-focused counterparts. 

Bond ETFs have issued $1.6 billion (0.3% of assets) in February even though they are down 1.7% year-to-date. ETF traders are evidently taking the losses of bond funds this year in stride. 

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on February 15, 2018 by -

Two advisor groups join Securities America

Securities America, the big independent broker dealer, announced this week that a consortium of independent advisors with $2 billion in client assets and a Super OSJ [Office of Supervisory Jurisdiction) with $1.5 billion in client assets have joined its independent advisory and brokerage platform.

The consortium’s 35 advisors are based on the east coast. Mike Rees, Bay View Capital Advisory Group, St. Petersburg, Florida, serves as the group’s OSJ. The Denver-based Super OSJ, co-managed by Brenda Wille-Cope and Gary Stirk, has more than 30 advisors in Colorado, Arizona, Washington and New York.

Stirk is the group’s registered principal and manages the New York branch. Wille-Cope oversees the Colorado, Washington and Arizona branches. Wille-Cope is managing partner of First Financial Strategies, Denver, Colorado.

She was preceded in that role by managing partner Phil Lubinski, who spearheaded the search after their broker-dealer was sold in late 2017. Lubinski is the co-creator of the Income For Life Model, the matrix for Securities America’s NextPhase program. He also co-developed IncomeConductor, which was recently approved for Securities America advisors.

Securities America, a wholly owned subsidiary of Ladenburg Thalmann Financial Services Inc., has more than 2,200 independent advisors and nearly $72 billion in client assets.

Transamerica survey publicizes Saver’s Credit

Transamerica’s Center for Retirement Studies is using its annual survey to stimulate awareness of the Retirement Savings Contributions Credit (“Saver’s Credit”). Almost two-thirds (64%) of workers are unaware of the credit, according to the 18th Annual Transamerica Retirement Survey.

The Saver’s Credit is a non-refundable tax credit that may be applied up to the first $2,000 of voluntary contributions an eligible worker makes to a 401(k), 403(b) or similar employer-sponsored plan, or a traditional or Roth IRA. The maximum credit is $1,000 for single filers or individuals and $2,000 for married couples.

The credit is available to workers ages 18 years or older who have contributed to a company-sponsored retirement plan or IRA in the past year and meet the Adjusted Gross Income (AGI) eligibility requirements:

Single filers with an AGI of up to $31,000 in 2017 or $31,500 in 2018; heads of households with AGIs of up to $46,500 in 2017 or $47,250 in 2018; couples filing joint returns with an AGI up to $62,000 in 2017 or $63,000 in 2018.

The filer cannot be a full-time student or be claimed as a dependent on another person’s tax return. To claim the credit, it’s necessary to use Form 1040, Form 1040A or Form 1040NR, and not Form 1040E.

Workers claiming the Saver’s Credit can also use the IRS Free Fileprogram. It offers free federal income tax preparation software to tax filers with an AGI of $66,000 or less. More than half of workers (55%) are unaware of this program, according to the Transamerica Retirement Survey.

Those preparing their tax returns manually should complete Form 8880, Credit for Qualified Retirement Savings Contributions, to determine their exact credit rate and amount. They should then transfer the amount to the designated line on Form 1040, Form 1040A or Form 1040NR.

New book from Wolters Kluwer explains impact of new tax law

To explain the new federal tax law’s impact for corporations and tax attorneys, Wolters Kluwer Legal & Regulatory U.S. has published “Law, Explanation and Analysis of the Tax Cuts and Jobs Act of 2017: A Guide to the Retirement Benefit Plans, Executive Compensation, Employee Benefits and Payroll Provisions.” 

According to Glenn Sulzer, J.D., a senior law analyst for Wolters Kluwer, the Act:   

  • Repeals the rule permitting Roth IRA recharacterizations
  • Imposes an excise tax on the excess compensation of executives of tax-exempt organizations
  • Provides a new income deferral election for qualified equity grants
  • Limits the $1 million deduction limit on executive compensation by removing the exclusion for performance based compensation
  • Expands the contribution options under 529 plans
  • Repeals the limited employer deduction for certain fringe benefits (such as entertainment)
  • Eliminates the deduction for qualified transportation fringe benefits
  • Suspends the income exclusion for moving expense reimbursements
  • Eliminates the individual mandate penalty enacted under the Affordable Care Act
  • Provides a temporary employer credit for paid family and medical leave
  • Substantially alters the personal income tax rates (which will lead to significant modification of the applicable income tax withholding rates)
  • Radically changes the standard deduction and personal exemptions allowed under pre-2018 law.

Great American’s fee-based FIA to appear on Quovo advisor platform

Great American Life said this week that it will integrate data for its fee-based indexed annuities with Quovo, the account aggregation service. Information about Great American’s Index Protector 7 will be available to the registered investment advisors (RIAs) who use the Quovo platform.

“Hundreds of investment advisory firms and thousands of advisors use Quovo to connect account data from over 14,000 financial institutions to gain a holistic view of their clients’ financial portfolios,” Great American said in a release this week.  

“With this new partnership, the Index Protector 7 can be displayed on many popular fee-based platforms that are used for portfolio management, reporting and billing. Additionally, Great American’s data can be displayed within various turnkey asset management programs (TAMPs).”

Great American Life Insurance Company® is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Securian adds a financial wellness service

Securian Financial Group has launched Financial Wellness 360, a financial wellness program available to all current and prospective Securian group insurance employer customers, Securian said this week.

Financial Wellness 360 is comprised of three solutions: SmartDollar, Advisor Connection, and Lifestyle Benefits 

SmartDollar provides a turnkey program with dedicated employee marketing support, end-to-end employee usage and results-reporting metrics along with instruction from well-known personal finance experts and best-selling authors.

Advisor Connection offers worksite seminars that teach personal finance and retirement strategies. Employees to learn directly from program-certified, registered financial advisors.  

Lifestyle Benefits is a suite of online and telephone-mediated self-service resources, including:   

  • Financial counseling and support
  • Financial assessments, articles and tips
  • Travel assistance, including emergency services
  • Beneficiary financial counseling
  • Will preparation guidance
  • Legal and grief counseling

© 2018 RIJ Publishing LLC. All rights reserved.

 

How to Have Enough Money for Retirement

Posted on February 7, 2018 by -

If you were to read through the papers on retirement income that were presented at the American Economic Association’s meeting last month in Philadelphia, you’d come away with a good sense of what it takes to accumulate enough money for a secure old age.

You need to do at least three of the following: Stay healthy, work longer, postpone Social Security, take a little more market risk, inherit money from your relatives, or buy an annuity that insures you against the chance that you might live beyond age 85.

Summaries of a few of the retirement-related papers that were presented at the meeting appear below. These papers are based on analyses of data sets such as TIAA participant history, Chilean defined contribution participant data, mathematical modeling of annuity benefits, and U.S. government surveys.

In short, academics continue to validate common sense and to measure what hides in plain sight. In a perfect world, their efforts might be superfluous or redundant. But, in the world we inhabit, relatively few individuals or institutions heed their warnings. So the work goes on.  

The value of longevity income annuities as 401(k) defaults

The search for a way to add a retirement income component onto defined contribution (DC) plans started at least 20 years ago, when the decline of defined benefit plans became obvious.

In “Putting the Pension Back in 401(k) Retirement Plans, Optimal versus Default Longevity Income Annuities,” Vanya Horneff, Raimond Maurer and Olivia Mitichell suggest that many U.S. retirees would be much better off if part of their qualified savings were defaulted into a annuity with income delayed until age 80 or 85.

Back in 2014, the U.S. Treasury cleared the way for this innovation by creating qualified longevity annuity contracts, or QLACs. This change in the tax code allows savers to apply up to 25% (or $125,000, if less) of their tax-deferred IRA or 401(k) savings to the purchase of an annuity whose payout could begin anytime between age 71 and age 85.     

Prior to the rule, savers could not exclude any portion of their qualified savings when they calculated their annual minimum distributions, which must begin at age 70½. Aside from affecting the RMD rules, the new rule also allows plan sponsors to default participants into QLACs.   

The authors of this paper assert that QLACs could improve the lives of many Americans if they were included as default distribution options in qualified plans. At retirement, they suggest, between as little as 8% to 15% of the account balance should be converted to annuities that starts paying income between the ages of 80 and 85.  

Having the QLAC would be tantamount to having as much as 20% more savings, they wrote. In their words, “Defaulting a fixed fraction of workers’ 401(k) assets over a dollar threshold is a cost-effective and appealing way to enhance retirement security, enhancing welfare by up to 20% of retiree plan accruals.”

The option would be more productive if people could exercise control over how much to annuitize and when to start payments, the paper said. “When participants can select their own optimal annuitization rates, welfare increases by 5-20% of average retirement plan accruals as of age 66 (assuming average mortality rates), compared to not having access to LIAs.”

Results are less positive for those with higher-than-average mortality rates, the paper notes. Since high mortality and low savings rates tend to go together, the authors suggest that “converting retirement assets into a longevity annuity only for those having at least $65,000 in their retirement accounts overcomes this problem.”

How many TIAA participants buy annuities?

A still-in-progress paper, “New Evidence on the Choice of Retirement Income Strategies: Annuities vs. Other Options,” describes individual annuity purchasing decision patterns among TIAA’s 403(b) plan participants since 1999. TIAA’s plan includes a multi-premium annuity option whose value builds up over time and which offers an opportunity for rising income in retirement.

Authors Jeffrey Brown, University of Illinois, James Poterba, MIT and the National Bureau of Economic Research, and David Richardson, TIAA, found that TIAA participants, most of whom work at colleges and universities, vary widely in their tendency to buy annuities.

Poterba said the data point to three conclusions so far:

  • There’s been a gradual shift away from annuities and toward minimum distribution payout options among TIAA beneficiaries over the past two decades. Almost 60% (59%) of initial income selections by TIAA participants in 1999 were either single or joint life annuities, compared with 30% in 2016. Minimum distribution options were selected by 20% in 1999, compared with 59% in 2016.
  • Among those who chose an annuity, not everyone chose the same type of contract. Among men who selected an annuity as a payout option in 2016, 37% chose single-life (11% without a guarantee, the other 26% with some guarantee period), and 63% chose a joint life (44% with full benefits to survivor and a guarantee period). 
  • For unknown reasons, a small but significant group of participants—about 12% in our sample—showed an “annuitization lag.” These participants waited at least three years between the year when they last contributed to their plan and the year when they first drew annuity benefits. 

“Only a minority of participants follow the strategy of accumulating until they retire, and then either purchasing an annuity or rolling their plan balance to an IRA,” the abstract of the paper said. “Many participants defer distributions until many years after their last contribution. Among those who annuitize, annuitizing part of the plan accumulation is more common than annuitizing the entire accumulation.” 

To be wealthy, choose your parents well

Having smart, successful, healthy parents matters a lot in determining what kind of retirement you’ll have, says the paper, “Longitudinal Determinants of End-of-Life Wealth Inequality,” by James Poterba, Steven Venti of Dartmouth and David A. Wise of Harvard. 

The determinants of your wealth tend to differ, depending on your age. In early life, it helps to have wealthy parents or grandparents. Wealth “dispersion in the first few decades of adult life,” the authors write, “reflects variation in the receipt of inter vivos transfers” [from living parents or grandparents, say].

In early adulthood, those who have good jobs have more money than those who don’t. In mid-life, those who’ve used their savings to make good investments naturally have more money. By retirement age, wealth is further determined by intergenerational wealth transfers—inheritances—and health. Those who feel healthy enough to keep working and saving have a clear advantage.

“Later in life,” the authors continue, “the rate of return on investments, the ability to continue working, receipt of a bequest, and the presence or absence of medical expenses contribute to the dispersion of wealth.”

Looking only at Americans who died by age 80, the authors found most Americans who enter retirement with a substantial amount of savings haven’t run out of money by the time they died. Those who do usually had very little wealth at retirement, lost a spouse and/or lacked adequate health insurance in retirement.

“About one third of the households… report lower wealth at death than at retirement,” the paper said. “The onset of a major health condition is associated with an increase in the fraction of persons with wealth below $100,000 from 21.3% to 23.8%. The loss of a spouse is associated with an increase in the likelihood of low wealth from 29.5% to 31.6% percent for [widowers] and from 27.2% to 30.5% for [widows].”

Why so many Chileans bought annuities at retirement

Cheaper annuity prices and the absence of crowding-out by a U.S.-style Social Security system in Chile help explain why more than 70% of single participants in Chile’s privatized defined contribution retirement system buy private life annuities with their savings at retirement.

So say Manisha Padi of the University of Chicago Law School and Gaston Llanes of Northwestern University, the authors of “Competition, Asymmetric Information, and the Annuity Puzzle: Evidence from a Government-run Exchange in Chile.”            

 

Since 1980, when the private system was set up, Chilean workers have been saving 10% of pay each year in funds managed by state-approved Administrators of Pensions Funds, or AFPs, and buying annuities from insurers, including MetLife and Ohio National. 

At retirement, participants can either buy a life annuity or take “programmed withdrawals” (PW). The PW option offers high payouts in early retirement than the annuity, a death benefit for bequest purposes, but no assurance of adequate income late in life.  

Chileans with high DC balances can get excellent pricing on annuities under this system. Chileans buy annuities with all or part of their DC savings by soliciting bids from insurers through a government-run exchange “that lowers search costs and allows highly personalized pricing.”

For low-wealth annuitants, fewer insurers place bids and the markups can equal 10% to 15% from fair actuarial value, as in the U.S. For high-wealth annuitants, insurers bid harder and markups are much lower. The average markup is 4% over actuarially fair. [This system was unpopular and is undergoing change. See below.]

 

Just as important, Chileans have no source of insurance against running out of money in retirement other than the private annuity market. There is less adverse selection in the Chilean market because there is no equivalent to U.S.-style Social Security in Chile. 

“If Americans no longer had the option to take Social Security, and instead had to take a phased withdrawal of the equivalent amount of money,” Padi told RIJ in an interview,” they would be more likely to purchase an income annuity with their private savings.”

One remaining question that’s not answered in the paper: Would as many Chileans still annuitize if, instead of PW, they could take all of their DC savings as a lump sum, as the vast majority of Americans do.

 

But Chile’s individualized DC-only system has not been universally popular, and reforms have been proposed so that employers and the government bear more of the pension risk. In September 2017, after the Padi-Illanes paper was written, Chile’s government proposed that employers contribute an additional 5% of income towards a mixed public-private system.

The system called New Collective Savings, would take 2% of the new employer contribution while the remaining 3% would be added to the individual’s private account. The “Collective Savings Council,” a non-profit entity, will manage the assets. The future of this reform remains unknown, given the pending takeover of a new government in March.

In Chile, participants who took more risk got higher rewards

By taking a little more risk and making slightly higher contributions, participants in defined contribution plans can significantly increase their balances at retirement, according to “Financial Investments Through the Life Cycle and Individual Risk Aversion: An Application To Private Retirement Systems,” by Marcela Parada of the Universidad Católica de Chile.

The research was based on the first four waves (2002-2009) of the Chilean Survey of Social Protection (EPS), a dataset that contains observed measures of risk aversion for a representative sample of the population over time and captures Chile’s long history with contributory retirement systems.

“Over seven years, slightly riskier investment strategies may increase individual asset accumulation by 8% or more,” she writes. “I find that individuals tend to quickly react to riskier investment strategies, despite the observed inertia in their behavior. This shows that their risk tolerance affects their optimal behavior and optimally influences their inertia in investments.”

Parada also found that increasing the mandatory defined contribution rate by three percentage points would generate 10% higher accumulations and an increase of five percentage points would generate 16% higher accumulations, “without generating crowding-out effects for financial investments.”

She also saw significant retirement benefits from part-time jobs for women who are also occupied raising children. “Employment opportunities for women with children who are currently not employed to hold a part-time job, generate a mean significant increase by 10% percent in asset accumulation, over 7 years,” she observed, adding that “other characteristics such as health status and family characteristics also have a significant effect on wealth accumulation.”

© 2018 RIJ Publishing LLC. All rights reserved.

New York, New Jersey, NAIC propose investor protections

Posted on February 7, 2018 by -

The Wagner Law Group has published the following summary of recent proposals or initiatives by entities other than the Department of Labor to raise the standards of advisor behavior and protect investors and seniors from predatory sales practices.     

The summary, released on January 31, 2018, describes proposals by the states of New York and New Jersey, and by the National Association of Insurance Commissioners. It also describes a completed action by the Financial Industry Regulatory Authority (FINRA) that took effect this week.

The summary as it applies to the retirement industry is reprinted below.

States proceed with their own fiduciary or “best interest” standards

While the U.S. Department of Labor (DOL) continues with its mandated review of the Fiduciary Rule and related exemptions, including the Best Interest Contract Exemption (“BICE”), states press on with developing their own rules to fill the vacuum.

We last discussed state-level legislation impacting investment advisers and other service providers, specifically with respect to Nevada and Connecticut, in a July 10, 2017 Newsletter. There has been recent activity involving New York and New Jersey, both of which have proposed new rules.

New York (“Best Interest”). On December 27, 2017, New York’s Department of Financial Services proposed amendments to add a “best interest” standard for sales of life insurance and annuity products in both retirement and non-retirement accounts.

This standard would be in addition to the existing suitability requirements. Recall that the BICE does not impact life insurance products. These proposed rules would cover this area unaddressed by the BICE. Like the Fiduciary Rule, the proposal broadens the scope of communications that are treated as “recommendations.”

Other proposed changes include:

  • A requirement to disclose at the time of the recommendation, all relevant suitability considerations and product information that forms the basis of the recommendation
  • A ban on any recommendation that states or implies that the recommendation is a part of financial planning, financial advice or investment management unless a certificate of professional designation has been obtained in that area
  • The implementation of procedures designed to prevent financial exploitation and abuse

The proposal is subject to a 60-day notice and comment period ending on February 26, 2018. New York is the first state to impose a “best interest” standard, but it is possible other states will follow suit.

New Jersey (Fiduciary Status). On January 9th, lawmakers reintroduced legislation requiring certain disclosures by non-fiduciary investment advisors after a similar measure failed to gain traction last year. If an advisor is not acting as a fiduciary, he or she is required to disclose this fact in a compulsory statement written in plain language: “I am not a fiduciary. Therefore, I am not required to act in your best interests, and am allowed to recommend investments that may earn higher fees for me or my firm, even if those investments may not have the best combination of fees, risks, and expected returns for you.”

The advisor will also be required to maintain a signed acknowledgement that the written disclosure was provided to the client. It is unclear whether the prospects for the legislation’s success are any better than the previous attempt made in 2017.

National Association of Insurance Commissioners (NAIC) (“Best Interest”)

The Annuity and Suitability (A) Working Group (“Working Group”) of the NAIC was charged with reviewing the Suitability in Annuity Transactions Model Regulations #275. In its open meeting on December 3, 2017, it proposed several changes including introducing a “best interest” standard.

Here, “best interest” means, “at the time the annuity is issued, acting with reasonable diligence, care, skill and prudence in a manner that puts the interest of the consumer first and foremost.”

The model language clarifies that “best interest” does not mean the least expensive annuity product, the product with the highest interest rate or payout rate, or the single best annuity product available in the market. Of course, individual states can deviate from the proposed model as they see fit. The public comment period recently ended on January 22, 2018.

FINRA (FAQs on financial exploitation of seniors)

New Rule 2165 (Financial Exploitation of Specified Adults) and amended Rule 4512 (Customer Account Information) are effective on February 5, 2018. Together they provide member firms with the tools to take action if they reasonably suspect that financial exploitation has occurred or will occur, not only with respect to those age 65 and older, but also those who may be impaired regardless of their age. 

As a result, firms can contact an account holder’s “trusted contact person” and/or place a temporary hold on disbursements from the account. Earlier this month, FINRA released Frequently Asked Questions (the “FAQs”) on these rules. The FAQs provide additional guidance about the placement of temporary holds, trusted contacts, and information permitted to be disclosed to trusted contact persons.

© 2018 The Wagner Law Group. 

Not All 401(k)s are Created Equal; Should They Be?

Posted on February 7, 2018 by -

The other day I was interviewing an Irish crypto-currency entrepreneur and the topic of 401(k) plans came up. The 401(k) system appears to be a single, homogeneous, nationwide program when viewed from a distance, I said. Since every plan follows the same Labor Department rules, a casual observer might assume that all plans must be the same.

So he looked puzzled when I said that the quality of 401(k) plans can differ dramatically from one company to another. The differences are regressive: They amplify whatever economic inequalities already exist in the workplace. 

Good plans and good jobs tend to go together, and bad plans and bad jobs tend to go together. If you can afford to save a lot, and if your company offers a 401(k) with a generous match and maybe a voluntary tax-deferred contribution to your account, you’ll probably retire with an adequate nest egg.  

But if you work in a company that doesn’t offer a plan, or offers a plan with no “match” and high fees, or defaults you into a permanent contribution of 3% per year, or your job is low-paid and you change jobs frequently, or if you need to raid your 401(k) to cover an emergency expense, then your chance of retiring with enough money is a lot smaller. In fact, you might be better off contributing to your own private Roth IRA at a no-load fund supermarket.

For most of us, this arrangement makes sense. To get better pay and benefits, you compete for them. Inequality can be a good thing: It rewards effort and drives progress. Besides, Social Security helps buffer the inequalities in retirement by replacing a higher percentage of lower-paid workers’ earnings.

But this arrangement makes no sense at all to Teresa Ghilarducci, Ph.D., the progressive economist and 401(k) gadfly at the New School, where she directs the Retirement Equity Lab. She’s outraged by it. And she’s not willing to wait for proposed innovations like state-sponsored mandatory savings plans or private multi-employer plans (MEPs) to level the playing field.   

She’d like to replace 401(k)s with a universal mandatory defined contribution plan whose balance would automatically convert to a low-cost life annuity at retirement. This new system, she says, would distribute the benefits of the government’s 12-figure annual tax expenditure for retirement savings—the annual cost of tax deferral in terms of reduced tax receipts—more equally (though contribution levels would still vary) than the 401(k) system largely because it would cover all workers instead of just the 50% or so of workers that participate in 401(k) plans at any given time. 

In support of her idea, she and New School colleagues Andrew Webb, research director at the Schwartz Center for Economic Policy Analysis, and grad student Siavash Radpour, presented a paper at the American Economic Association’s annual meeting, held in Philadelphia a few weeks ago.

“We find that retirement wealth is highly unequally distributed. We also found that mean and median total retirement wealth, conditional on owning any wealth, changed little over the period 1992-2010 despite older workers needing more wealth. A shift from DB to DC was associated with an increase in retirement wealth inequality over the period from 1992 to 2010, reflecting the rise in share of older workers who have no retirement wealth.

“A DC system may have increased inequality by variation in wealth because of variation in financial returns, because of one’s age cohort, because one faces the risk of choosing a bad portfolio, or paying excessive fee risk, or having an employer who does not sponsor a plan or who chooses bad investment alternatives,” the paper said.

Because of Ghilarducci’s revolutionary views—her solution to retirement inequality would entail nothing less than a nationalization of the enormous private retirement industry in the U.S.—talk radio host Rush Limbaugh once called her “the most dangerous woman in America.”

But she has in recent years gained a mainstream ally in Blackstone COO Hamilton “Tony” James. Their book (Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, Columbia Business School Publishing, 2017) has been endorsed by former New York mayor Michael Bloomberg and former Treasury Secretary Robert Rubin. Its second edition has just been published.

I think Ghilarducci’s voice needs to be heard. If competition drives progress, then we need to consider competing views about defined contribution plans. In fact, her idea isn’t much different from proposals in other countries for creating defined contribution plans that include retirement income components. (See today’s story in RIJ on the new Royal Mail “defined ambition” plan in the UK.)

But to gain more allies in the U.S., she’ll have to convince enough people that (a) tax deferral is a true federal expenditure and not just a deferral; that (b) luck plays a large role in human and corporate success and society needs to protect people who have the worst luck; and that (c) at a point, income inequality becomes economically counter-productive, even for the winners.

I don’t expect that to happen. In 2019, depending on how the mid-term elections affect the balance of power in Congress, we may begin to hear arguments from Speaker of the House Paul Ryan and others that Social Security costs America too much and needs to be cut. Not only is there very little political will to do what Ghilarducci recommends, there may not even be enough will to preserve Social Security as we know it.

© 2018 RIJ Publishing LLC. All rights reserved.

England’s first hybrid retirement plan gets a tentative start

Posted on February 6, 2018 by -

After months of negotiations, Britain’s Royal Mail and the leadership of the Communications Workers Union (CWU) have agreed to create the United Kingdom’s first “collective defined contribution” (CDC) retirement plan. It will deliver non-guaranteed retirement income to participants.

The Royal’s defined benefit pension (RMPP) will stop accepting contributions on March 31, 2018. It will be replaced by CDC, a hybrid of defined contribution and defined benefit that has been dubbed “defined ambition” in the U.K.

But there’s a big hurdle left. Royal Mail and the CWU must lobby the British government to make legislative and regulatory changes so that they can establish their plan, IPE.com reported. CWU members must vote on the proposal and have been encouraged by the union to accept the deal.

Under an agreement made public this week, Royal Mail will contribute 13.6% of members’ pensionable pay to the new CDC plan and union members will contribute 6%. The plan would pay a target level of income in retirement, but the income level would not be guaranteed. 

A “defined benefit cash balance scheme” will exist alongside the CDC. It would fund the payment of guaranteed lump sums to members at retirement, with discretionary increases if investment performance allows. Until a CDC scheme is officially launched at Royal Mail, employees will save into the company’s existing defined contribution plan and the new cash balance fund.

Royal Mail said the new pension arrangement would cost roughly £400 million (€457 million or $563.65 million) per year. That’s comparable to the cost of its existing DB pension, but without the longevity risk or market risk. Last year, Royal Mail warned that its annual pension costs could reach £1bn (€1.124 billion) if the RMPP were not changed.

The new pension arrangement is “an affordable and sustainable solution that enables us to continue to innovate and grow and to meet the intense competition with confidence,” said Moya Greene, Royal Mail’s CEO, in a statement.

The birth of UK CDC

In 2015, the UK passed primary legislation to allow defined ambition plans, but the government abandoned the idea and has not yet introduced the secondary legislation required to make them possible. In November, the Work and Pensions Select Committee of the UK’s parliament launched an inquiry as to how the plans would work.

The Select Committee wants to “retain some of the best features of [defined benefit pensions] in a different age when employers are no longer willing or able to sustain the burden of final salary promises to employees, who could club together and pool the risk themselves,” Frank Field, chair of the committee, said this week. 

The committee’s call for evidence closed yesterday with 19 responses so far made public. Respondents include academics, consultants, trade bodies and pension funds, including master trust NEST and Dutch civil service scheme APG. 

© 2018 RIJ Publishing LLC. All rights reserved.

Managed accounts are a proxy for income options in DC plans: Cerulli

Posted on February 6, 2018 by -

Despite strong annual growth, defined contribution (DC) managed accounts still represent only about 4% of total DC assets, according to Cerulli Associates, the global research consultant.

“Cost concerns, lack of participant understanding, and lack of qualified default investment alternative status” inhibit adoption of managed accounts in DC plans, said Jessica Sclafani, a director at Cerulli. Eight companies currently provide managed accounts to plan sponsors.

Plan sponsors offer managed accounts primarily because they “can be positioned as a retirement income solution,” Sclafani said in a release. “While the DC industry continues to wonder how best to structure in-plan retirement income solutions with guaranteed interest components, managed accounts are quietly making progress as a less controversial option for plan sponsors to offer participants.”      

“Managed account providers seeking to demonstrate how their services are worth the additional cost versus a traditional target-date fund should focus on the additional capabilities a managed account service offers,” she added.

While 68% of the top-25 DC recordkeepers (by 2016 record-kept assets) offer a proprietary target-date fund, Cerulli said, only 28% offer a proprietary managed account service.

“Recordkeeping is sometimes referred to as a commoditized business,” Sclafani said. “But there are higher-margin asset management opportunities, such as proprietary target-date or managed account solutions.”  

Cerulli’s latest report, U.S. Retirement Markets 2017: The Rise of Fiduciary Services, provides analysis of the U.S. retirement market; examines corporate defined benefit and DC assets, plans, and participants by plan asset and participant segment; and sizes the IRA market by assets and number of accounts.

© 2018 RIJ Publishing LLC. All rights reserved.

ADP and Financial Engines in financial advice deal

Posted on February 6, 2018 by -

Financial Engines, which provides web-based advice and managed account services to millions of retirement plan participants, and ADP, the plan recordkeeping and administration giant, announced this week that ADP will begin offering Financial Engines to its clients as its exclusive advice option.

The Financial Engines advisory service offering, on the ADP platform, will launch in the summer of 2018. “It will broaden ADP’s financial wellness capabilities,” the two publicly-traded firms said in a release.  

“This will be the first time Financial Engines will build an automated service capable of on-boarding thousands of plans a year,” John Bunch, executive vice president and chief operating officer at Financial Engines, told RIJ in an email this week. “The partnership will also broaden ADP’s financial wellness capabilities that aim to help 401(k) participants better prepare for day-to-day expenses and broader financial challenges.”

Asked if the deal will open up new markets to Financial Engines, Bunch wrote, Our strategic relationship with ADP will enable us to help 1.7 million more Americans—including those who work at micro-, small and mid-size businesses—that might not otherwise have access to quality, independent and comprehensive financial advisory services that they need to live and retire well.”

FE will be a standard part of the ADP retirement services offering,” Bunch added. The offering will be available to retirement plan sponsors on the ADP Retirement Services platform. For sponsors offering Financial Engines, we are able to serve participants in their plans online, over the phone through our National Advisor Center, or in-person at 140-plus advisor center locations.”

ADP is also accepting Financial Engines as its exclusive advice provider. “With the new relationship, Financial Engines will be the only advice provider on the ADP recordkeeping platform,” Bunch said.

Financial Engines’ direct advisory services for participants include:

  • Online savings and investment advice and retirement income services for employees who want to manage their retirement themselves.
  • A discretionary managed account service for participants who want to delegate the management of their retirement accounts to a professional.
  • Income planning and Social Security claiming guidance via Financial Engines’ Social Security Planner.
  • Professional management for all participant accounts (401(k), IRA and taxable accounts) by a dedicated advisor.

Participants will also have access to Financial Engines’ non-commission-based Investment Advisor Representatives, as well as to independent online investment advice, and to ongoing financial wellness programs and education.

© 2108 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on February 6, 2018 by -

Lori Lucas to lead EBRI

Lori Lucas has been appointed president and CEO of the Employee Benefit Research Institute (EBRI), the non-profit source of data on corporate retirement and health plans. The former Callan Associates executive, who had been an EBRI board member, succeeds Harry Conaway.

In a release, EBRI said Lucas has 32 years of experience in the investment and benefits industry, most recently as an executive vice president at Callan, where she managed the Defined Contribution Consulting Team.  

Lucas “will be joining the organization at a pivotal time in our country’s economic history, including unprecedented challenges to American workers’ financial security” and “making EBRI’s research more widely accessible and relevant.”

Prior to working at Callan, Lucas was director of Retirement Research at Hewitt Associates, vice president at Ibbotson Associates, a consultant at the pension fund J.H. Ellwood & Associates, and an analyst and product head at Morningstar, Inc. She holds a B.A. from Indiana University and a masters degree from the University of Illinois.

A CFA Charterholder, Lucas is the immediate past chair of the Defined Contribution Institutional Investment Association. She is on the editorial advisory board of Benefits Quarterly and is a former columnist for Workforce Management magazine.

Prudential in $1.8 billion pension risk transfer deal with Scottish Widows Ltd

The Prudential Insurance Company of America, a Prudential Financial, Inc. company, has assumed the longevity risk for approximately $1.8 billion (£1.3 billion) of annuity liabilities held by Scottish Widows Limited, a unit of Lloyds Banking Group plc.

It was the first longevity risk transfer agreement between the two firms. The announcement was made by Michael Downie, the finance director, Annuities and Investment Strategy at Scottish Widows, and Amy Kessler, Prudential’s head of longevity reinsurance.

Prudential has executed more than $45 billion in international reinsurance transactions since 2011, including the largest longevity risk transfer transaction on record, a $27.7 billion transaction involving the BT Pension Scheme. Scottish Widows was founded in 1815 as Scotland’s first mutual life office.

DPL aims to bring no-commission insurance products to RIAs

DPL Financial Partners said a “growth capital investment” from Eldridge Industries and the addition of a half-dozen insurance consultants will further its effort “to bring low-cost, commission-free insurance products to registered investment advisors (RIAs) and their clients.”

DPL, which describes itself as an RIA insurance network that brings a full suite of low-cost, commission-free life and annuity products to RIA practices, will “bridge the gap” between registered investment advisors and insurance carriers, said CEO David Lau in a release. 

“The idea for DPL Financial Partners was born from decades of observing a total disconnect between insurance carriers and RIAs,” he said DPL CEO David Lau. “RIA clients need insurance…, yet their advisor cannot provide the products… because the overwhelming majority of insurance products are commission-driven.” 

Lau, formerly with Jefferson National and Telebank, added that the newly hired team, including six professionals to consult directly with advisors and their clients on insurance planning, along with senior support staff in technology and marketing, will expand DPL’s ability to serve RIAs across the U.S.

DPL aims to reinvent how insurance is delivered in the fee-only space. “DPL is an insurance network for RIAs. RIAs access our consultants to help find and implement low-cost, commission-free insurance products for their clients,” Mr. Lau explained. “At the same time, we create an effective way for carriers to reach this important market.”

The release said DPL will do this by serving RIAs as an agnostic consultant, consulting with insurance carriers to support and develop commission-free products, and bringing to market quality, low-cost, commission-free products that fit the RIA model.

Nuveen expands DCIO team

Nuveen, TIAA’s global asset management unit,  said it has appointed several executives to positions supporting its expanding Defined Contribution Investment Only (DCIO) enterprise. Nuveen re-positioned its DCIO business in 2015.

 “Our active and index target date strategies [are] seeing particularly high levels of inflows,” said Erin Donnelly, executive vice president and head of Nuveen’s DCIO business, in a release. “Our DCIO business grew nearly 40% in 2017.”

Additions to Nuveen’s DCIO team include:

Peter Whitman joined the firm as managing director for DCIO Strategic Accounts, reporting to Ms. Donnelly. He will oversee the firm’s retirement presence across recordkeeping, retirement intermediary and other third-party retirement platforms and relationships. Whitman will also focus on building Nuveen’s retirement sub-advisory business.

Greg Koleno joined the DCIO sales team reporting to Brendan McCarthy, DCIO National Sales Director. Based in Portland, Oregon, Koleno is responsible for DCIO sales in the Northwest. Previously, he was held a similar position at American Century Investments.

James Polito joined the DCIO sales team, also reporting to McCarthy. Based in Charlotte, North Carolina, Polito is responsible for DCIO sales in the Southeast. Most recently, he held a similar position at BNY Mellon.  

Nuveen also hired Jeff Eng as managing director responsible for retirement solutions, reporting to Martin Kremenstein, senior managing director and head of Nuveen’s retirement and ETF solutions business. Eng will lead new product initiatives. Previously, he was head of the custom defined contribution solutions business at AB.

Nuveen describes itself as the fourth largest investment manager of defined contribution assets in the United States and the sixth largest manager of target date fund assets. Its DCIO team works in consultation with plan sponsors, consultants and retirement plan advisors.

The DCIO team offers fixed income and equity mutual funds as well as environmental, social and governance (ESG) equity and fixed income funds, including the TIAA-CREF Social Choice Bond Fund (TSBIX). The team also offers active and passive target date funds such as TIAA-CREF Lifecycle 2040 (TCIOX) and TIAA-CREF Lifecycle Index 2040 (TIZLX), asset allocation strategies that can act as the qualified default investment alternative (QDIA) of defined contribution plans.

Anthem adds $58 million to employees’ retirement accounts

Anthem, Inc., whose health plans serve some 40 million Americans, said this week that it will contribute $1,000 to the 401(k) accounts for each of its more than 58,000 associates and recent retirees, or about $58 million, as a response to the recent revisions to the U.S. tax code.  

 In total, Anthem will contribute more than $58 million to the program which helps Anthem associates plan for their retirement and the needs of their families in the future. In addition to the Anthem 401(k) program, the company is investing savings from the changes in the tax code in other efforts to reduce the cost of healthcare and benefit customers and shareholders.

Anthem’s full-time, part-time, temporary associates and recent retirees are eligible to receive the 401(k) contributions. For eligible associates who have not previously participated in Anthem’s 401(k), the company will automatically establish a 401(k) account and make the $1,000 investment.

Associates will receive the contribution on March 29 and have the ability to select how the money is invested by choosing from the 15 investment options that are offered through Anthem’s 401(k) program.

© 2018 RIJ Publishing LLC. All rights reserved.