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A ‘Blueprint’ to Sell Income Annuities Direct

Posted on January 31, 2018 by -

Blueprint Income is the new name of what was Abaris Financial, a firm created in 2014 in Philadelphia to sell immediate and deferred income annuities via licensed phone reps to do-it-yourself Gen-Xers and others over the Internet.

Abaris stalled, but the new platform looks more viable. It has a friendly interface and a mission to sell not just single premium products but also multi-premium income annuities, or “personal pensions,” to people five or more years from retirement. It also boasts more than dozen carrier partners (including Nationwide, which has been running its own experiments with Internet-sold multi-premium income annuities in the Arizona market.)

Matt Carey, a co-founder of Abaris with Wharton School credentials, told RIJ this week that the company, whose website now indicates a Manhattan address, is delaying publicity until a hard launch of its new brand in a few weeks.

“We’re releasing a bunch of new tech in the next couple weeks, along with a funding announcement, so we’ve decided to hold off on talking to media outlets until then,” Carey said in an email. On its website, the company promises, “We put the customer first by taking lower commissions from insurance companies to offer you the highest possible rates.” 

Recognizing the tainted image of annuities in the public mind, Blueprint Income has distanced itself from the most widely-sold products, even distinguishing between what it calls “good” annuities (income annuities, qualified longevity annuity contracts, plain-vanilla fixed deferred annuities) and “bad” annuities (indexed and variable annuities) on its website.

Virtually all of the major income annuity issuers are represented on Blueprint Financial’s quote engine. An RIJ request entered at the site for bids on a $100,000 deferred income annuity (DIA) for a 66-year-old male with a deferral to age 80 elicited monthly payout offers between $1,224 and $1,434 from New York Life, MassMutual, Guardian, Mutual of Omaha, Lincoln Financial, Principal, Pacific Life, Symetra, and AIG.

Mutual of Omaha offering the highest monthly payout. (See chart on RIJ homepage). Along with those quotes, the website indicated that it had information about additional contracts from USAA, Integrity Life, Nationwide, Americo and Foresters Financial.

The initial quote list from Blueprint Income did not give details about the contract structures. A comparable request sent to immediateannuities.com returned an average payout of $1,502 a month for a life-with-cash-refund DIA and $1,933 a month for a life-only DIA.

A January 5 post on the Blueprint Financial website said, “Frankly, the decision to update our name and brand has been an easy one. Abaris never clicked with users, investors or even us. Abaris, in Greek mythology, advised Apollo on important decisions. But not everyone knew that. And not everyone pronounced it the same way. We love how Blueprint Income gives us a way to talk about what we do and how we do it in a simple and emotive way.”Insurers on the Blueprint Income platform

In past statements, Carey and co-founders Adam Colombo and Nimish Shukla have said they’re focusing on the self-reliant Gen-X market and female markets, with an emphasis on transparency and integrity and a website that follows the airy, colorful, simple, utterly unambiguous user-interface style that has for at least three years been the standard in the fintech world and beyond.

A just-published report on insurance fintech from Aite said Abaris/Blueprint Income said:

“Abaris is providing a great tool for consumers in the market for annuities to buy without guidance or solicitation. It is perfect for the do-it-yourself buyers who know what they want. Its extensive online application helps to complete the transactions online without additional carrier contact. Carriers are obviously comfortable with its approach, given the breadth of quality annuity providers brokering through its platform.”

“Abaris is convinced that purchasing annuities online will become the preferred annuity purchase method going forward. In fact, Abaris is so convinced of this approach that it is launching a companion website called Blueprint Income. Blueprint Income will focus on delivering what it calls “personal pensions” online and will target Generation Xers (people born roughly between 1965 and 1981).”

Back in 2014, Carey told RIJ:

“We have two business lines. First, we represent a new sales channel for insurers. We act as an insurance producer and work on a commission basis.  We have relationships with seven insurance carriers in this market.  As the largest fixed annuity underwriters (such as New York Life, MassMutual, and Northwestern Mutual) unveil their QLAC [qualified longevity annuity contracts] products later this year, we hope they will also join our platform.

“Our second business line is analytics. We’re building out a data-driven platform that will enable carriers to make more informed underwriting, marketing and new product development decisions. You glean a lot more about potential customers when they are researching and getting quotes online than when they are being sold a product offline.  We think this shift to online research and purchasing represents an exciting opportunity for the carriers to harness data to make better decisions.”

The online income annuity sales landscape is by no means crowded—U.S. sales of immediate and deferred income annuities were just $7.9 billion in the first three-quarters of 2017, according to LIMRA. It has always been a bit complicated by the fact that the big mutual insurers, which are the main issuers of income annuities, have their own agents and don’t want to cannibalize that channel. But New York Life, for instance, has said it would like to stimulate third-party sales.

Blueprint Income enters an online annuity marketplace field populated with Fidelity’s income annuity platform, Kelli Hueler’s Income Solutions platform, and Hersh Stern’s incomeannuities.com.

In the past year, Nationwide has been testing direct online sales of multi-premium income annuities with a pilot program limited to the Arizona market. Stan “the Annuity Man” Haithcock, a champion of insurance-only annuities, has also announced a venture in direct income annuity sales.

Each of these firms has its own business model. Many if not most of the purchases on Fidelity’s platform are driven by Fidelity clients whose Fidelity-affiliated advisors recommend them. Income Solutions serves individuals and advisors, but its primary mission has been to serve people who are retiring from large 401(k) plans, including those of Boeing, GM and IBM, and all Vanguard-administered plans. Nationwide’s platform will be proprietary. Stern’s business is independent.

All of these platforms provide competitive bids from competing insurers. That gives consumers an informational advantage that they don’t have when buying from a captive agent who presents only his or her company’s product. Cannex, the Canadian-American annuity quote and price comparison site, is the biggest provider of real-time annuity quotes to the platforms (with the exception of Income Solutions).

Direct-selling annuities to consumers challenges the conventional wisdom that annuities are sold, not spontaneously bought, by the investing public. There’s also the obvious issue with regulation; sales of annuities require the intermediation of a licensed insurance agent, and fixed annuity issuers, sold online or not, have historically paid a one-time fee of 2% to 3% to independent agents. The purchaser doesn’t see that fee; it’s baked into the monthly payment. 

But consumer habits have changed. It’s now assumed that not just Millennials but Americans of all ages have become accustomed to and may even prefer online financial transactions. Research has suggested that consumers feel more “in control” of the process when they buy online, where there’s little or no sales pressure and they may have an informational advantage.  

© 2018 RIJ Publishing LLC. All rights reserved.

Flat Rich: How Airbnb Saved the Quinteros’ Retirement

Posted on January 25, 2018 by -

The Baby Boomer retirement wave, the damage done to global social security systems by the financial crisis, and the exponential growth of Airbnb’s online lodging network, have more or less coincided over past ten years. If that convergence is an accident, it doesn’t quack like one.

For Jesus Quintero Alvarez, a 61-year-old topographical engineer in Seville, Spain, those three trends are the story of his life. Mr. Quintero was born midway into the post-WWII fertility boom, in 1955. As he and his wife neared retirement age, Spain reduced the generosity of its state pension. And he salvaged his retirement by becoming an Airbnb entrepreneur.    

Mr. Quintero, his wife Rita, and his son Paulo, 35, a mechanical engineer, sat down at the dining room table in one of their two Airbnb apartments in Seville recently to tell their story. It’s a story about weakening social safety nets, personal resourcefulness and Airbnb, which, in a sense, has usurped life insurers as a provider of lifetime income for retirees worldwide.

You’re fired!

Mr. Quintero worked for 35 years at a multinational construction company that built homes, apartment complexes, roads and bridges. Only 52 years old when the eurozone’s financial crisis erupted in 2008, he survived several rounds of layoffs and expected to work until he reached full pension age at 65.

Spain’s social security pension is generous, to a fault. Its 80% initial replacement rate is twice the median replacement rate of Social Security in the U.S. It’s funded (or rather, underfunded; it’s running a government-financed deficit €18 billion a year) by a payroll tax of about 30% (25% from the employer and 5% from the employee). 

But two years ago, Mr. Quintero’s employer, fired him without specific cause, leaving him five years short of full pension age. Unemployment benefits (which, like the pension, are richer in Spain than most other EU countries) helped ease the pain. As for severance pay, but he had to go to court to force his company to pay him the 30% (€43,000, or $53,340 at today’s exchange rate). 

Calle Mateos Gago Sevilla  

His involuntary early retirement would reduce his annual pension by 7.5%, he said. That shortfall alone might not sound crushing, but under Spain’s recent financial reforms, pensions are no longer indexed to inflation. By capping annual increases at 0.50%, Spain hopes to inflate away a chunk of its pension burden. The Quinteros would also be without a 401(k) type savings plan or a “spousal benefit” for Sra. Quintero; Spain has neither.

The Quinteros held a family meeting to decide what to do next. They didn’t need to worry about health care; it’s universal. But they still faced a future of steady declining purchasing power unless they found a source of supplemental income. But how to get it? Since they live in tourist-heavy Seville, the answer was rather obvious.

Spain’s tourism boom

Spain in general and Seville in particular have been major tourist destinations since tourism was born in the 19th century. But in recent years, Spain’s tourism industry has mushroomed. That’s a dividend, ironically, of the eurozone’s financial crisis, which hit Spain (along with Greece, Italy and Portugal) especially hard. 

After Spain’s real estate bust in 2008, its citizens, banks, and government all woke up to a hangover of hundreds of billions of euros in external debt that it could never pay back. Bound to the euro, Spain couldn’t devalue its currency (and thereby revive its export competitiveness). So the whole country took a pay-cut of up to 15%. This “internal devaluation” sparked booms in manufacturing and tourism. In 2016, Spain, a country of 46.5 million, received 75.6 million foreign visitors. In July 2017, 10.8 million people visited Spain, setting a single-month record.

Tourists in general are using organized packages less often and switching to DIY travel. In Spain, one result has been that while hotel traffic grew only 4.1% from 2015 to 2016, the use of short-term apartments grew 23.2% (albeit from a smaller base). The number of Airbnb properties has been doubling every year. The online service now accounts for a reported 54.2% of all available vacation rentals in Spain.

At their family meeting, the Quinteros decided to enter the Airbnb business, and to do it seriously, not as a hobby.  They are now among the 37% of Seville’s Airbnb hosts who have been with Airbnb for two years or more, the 69% who solicit bookings “regularly,” and the 36% with two listings, according to a University of Seville survey of 100 Airbnb hosts.

Bosch appliances, marble baths

With caution, the Quinteros crunched the numbers. First, they calculated their net income needs. Then they imagined the type of property that could generate enough top-line revenue to produce a satisfactory bottom line–after the considerable cost of a mortgage, utilities, maintenance, management and a 20% municipal lodging tax.

They needed a safe investment—a premium property that could maintain a reliable year-round occupancy rate in the face of competition with other Airbnb properties and with Seville’s bouquet of boutique hotels, which offer luxury rooms for $100 to $200 a night in winter and $200 to $350 a night in summer.

So they bought two flats in a strategic neighborhood. Seville is a 2,000-year-old city of about 700,000 people 120 miles north of Mediterranean beaches. Ornamented with Roman, Moorish and Spanish Imperial architecture, Seville’s oldest, quaintest section is Barrio Santa Cruz, a labyrinth of narrow alleys surrounding Seville’s landmark Giralda bell tower and Cathedral of Santa Maria de la Sede. 

The epicenter of dining and lodging in the barrio is Calle Mateos Gago (pictured above), a cobblestone lane lined with orange trees and bistros, called tapas bars. There the Quinteros found an old building that had been gutted and converted into contemporary apartments, each with a small living room/dining room, a galley kitchen with a Bosch stove and dishwasher and two marble baths. If the apartment sold in line with prices of comparable properties, the Quinteros paid about €250,000 (about $300,000) for each. 

Borrowing to buy two apartments was a big gamble to take late in life. But the Quinteros saw it as a multi-generational investment. The three of them handle all the chores. They charge $190 per night (discounted to $3,200 per month). By attending to detail (professional-grade photos for their Airbnb webpage; in-person welcomes; chocolate truffles for new arrivals), they’ve earned a five-star, 9.8 Airbnb rating from guests. Perfect user ratings are a key to success in the Airbnb game.

No coincidence

This story began with the question: Is it an accident that Boomer retirement, the damage inflicted on public pensions by the financial crisis, and the rise of the global Airbnb phenomenon have all occurred within more or less the same time period? Probably not.

Airbnb is in the right place at the right time. Almost as soon as the service appeared, older people and empty nesters with spare bedrooms or apartments recognized that rental income could cover their savings gaps. At the same time, Boomers with an itch for international travel in retirement recognized in Airbnb a way to see the world on the cheap. Four million properties in 191 countries now use the platform.

That doesn’t mean that hosting is easy. Once Airbnb’s potential for monetizing surplus real estate became clear, it was inevitable that entrepreneurs would turn it from an amateur endeavor to a cutthroat professional one. Airbnb’s low barrier to entry also makes it ruthlessly price-competitive and, inevitably, reduces the odds of success. The Quinteros say they understand the risks, and they’re ready to do what it takes to reap the rewards. 

© 2018 RIJ Publishing LLC. All rights reserved.

The World’s Priciest Stock Market

Posted on January 25, 2018 by -

The level of stock markets differs widely across countries. And right now, the United States is leading the world. What everyone wants to know is why – and whether its stock market’s current level is justified.

We can get a simple intuitive measure of the differences between countries by looking at price-earnings ratios. I have long advocated the cyclically adjusted price-earnings (CAPE) ratio that John Campbell (now at Harvard University) and I developed 30 years ago.

The CAPE ratio is the real (inflation-adjusted) price of a share divided by a ten-year average of real earnings per share. Barclays Bank in London compiles the CAPE ratios for 26 countries (I consult for Barclays on its products related to the CAPE ratio). As of December 29, the CAPE ratio is highest for the US.

Let’s consider what these ratios mean. Ownership of stock represents a long-term claim on a company’s earnings, which the company can pay to the owners of shares as dividends or reinvest to provide the shareholders more dividends in the future. A share in a company is not just a claim on next year’s earnings, or on earnings the year after that. Successful companies last for decades, even centuries.

So, to arrive at a valuation for a country’s stock market, we need to forecast the growth rate of earnings and dividends for an interval considerably longer than a year. We really want to know what the earnings will do over the next ten or 20 years. But how can one be confident of long-term forecasts of earnings growth across countries?

In pricing stock markets, people don’t seem to be relying on any good forecast of the next ten years’ earnings. They just seem to look at the past ten years, which are already done and gone, but also known and tangible. But when Campbell and I studied earnings growth in the US with long historical data, we found that it has not been very amenable to extrapolation. Since 1881, the correlation of the past decade’s real earnings growth with the price-earnings ratio is a positive 0.32.

But there is zero correlation between the CAPE ratio and the next ten years’ real earnings growth. And real earnings growth per share for the S&P Composite Stock Price Index over the previous ten years was negatively correlated (-17% since 1881) with real earnings growth over the subsequent ten years. That’s the opposite of momentum. It means that good news about earnings growth in the past decade is (slightly) bad news about earnings growth in the future.

Essentially the same sort of thing happens with US inflation and the bond market. One might think that long-term interest rates tend to be high when there is evidence that there will be higher inflation over the life of the bond, to compensate investors for the expected decline in the dollar’s purchasing power. Using data since 1913, when the consumer price index computed by the US Bureau of Labor Statistics starts, we find that the there is almost no correlation between long-term interest rates and ten-year inflation rates over succeeding decades. While positive, the correlation between one decade’s total inflation and the next decade’s total inflation is only 2%.

But bond markets act as if they think inflation can be extrapolated. Long-term interest rates tend to be high when the last decade’s inflation was high. US long-term bond yields, such as the 10-year Treasury yield, are highly positively correlated (70% since 1913) with the previous ten years’ inflation. But the correlation between the Treasury yield and the inflation rate over the next ten years is only 28%.

How can we square investors’ behavior with the famous assertion that it is hard to beat the market? Why haven’t growing reliance on data analytics and aggressive trading meant that, as markets become more efficient over time, all remaining opportunities to secure abnormal profits are competed away?

Economic theory, as exemplified by the work of Andrei Shleifer at Harvard and Robert Vishny of the University of Chicago, offers ample reason to expect that long-term investment opportunities will never be eliminated from markets, even when there are a lot of very smart people trading.

This brings us back to the mystery of what’s driving the US stock market higher than all others. It’s not the “Trump effect,” or the effect of the recent cut in the US corporate tax rate. After all, the US has pretty much had the world’s highest CAPE ratio ever since President Barack Obama’s second term began in 2013. Nor is extrapolation of rapid earnings growth a significant factor, given that the latest real earnings per share for the S&P index are only 6% above their peak about ten years earlier, before the 2008 financial crisis erupted.

Part of the reason for America’s world-beating CAPE ratio may be its higher rate of share repurchases, though share repurchases have become a global phenomenon. Higher CAPE ratios in the US may also reflect a stronger psychology of fear about the replacement of jobs by machines. The flip side of that fear, as I argued in the third edition of my book Irrational Exuberance, is a stronger desire to own capital in a free-market country with an association with computers.

The truth is that it is impossible to pin down the full cause of the high price of the US stock market. The lack of any clear justification for its high CAPE ratio should remind all investors of the importance of diversification, and that the overall US stock market should not be given too much weight in a portfolio. 

The Fragility of VA Living Benefit Guarantees

Posted on January 25, 2018 by -

There’s a potboiler waiting to be written about the boom and bust of the variable annuity market from the mid-1990s to the mid 2010s. Of that I have no doubt. In the meantime, two economists, Ralph Koijen of NYU’s Stern School and Motohiro Yogo of Princeton, have published a technical post-mortem of the VA debacle of a decade ago.

The equation-rich article, “The Fragility of Market Risk Insurance” (NBER Working Paper 24182, January 2018), isn’t an easy read for the non-economist, even on multiple readings. But it adds some accessible details to the history of VAs—a history that we need to study or risk repeating.

For their part, the authors claim to provide “a more complete theory of the supply side of insurance markets that explains pricing, contract characteristics, and the degree of market incompleteness.” I took that to mean: Why some VA issuers had to drop out of the business.

Check out the scatter charts

VA industry veterans won’t be surprised at some of the authors’ conclusions. Rich roll-up rates fueled demand for VAs with guaranteed lifetime withdrawal benefits (GLWBs) and rising fees depressed it. After the stock market and interest rates dropped in 2008, declines in the valuation of the reserves behind VA guarantees.

These declines led to shrinkages in supply, as issuers with too much “financial friction” (the difference between earnings from capital and the cost of capital) and less “market power” (the ability to raise fees and stay competitive) reduced their sales or fled the space entirely.

For the reader who wants information about specific companies, the most relevant aspect of the report may be two scatter charts in the appendix. Both charts populated by the names of VA issuers (though some names are unfortunately obscured by others in this version of the paper).

The first chart (below) shows the issuer-by-issuer relationship between VA sales growth and changes in reserve valuations (I took this as an indication of the decline in the value of assets supporting liabilities) between 2007 and 2010. Note the negative correlation between the two, and note the outliers.

Koijen Chart 1

AXA and Genworth had the biggest changes in reserve valuations and saw some of the biggest percentage drops in sales growth. Jackson and Prudential, during the same period, enjoyed the biggest increases in sales growth and saw some of the smallest increases in reserve valuations. Little mystery that they could keep selling VAs in volume after 2010. Note also that MetLife, AEGON and Sun Life experienced almost no change in sales growth even as they absorbed a fairly high increase in reserve valuation. 

The second chart (below) shows the positive correlation between the percent of reserves reinsured and the changes in reserve valuations over that three-year period.

Koijen chart 2

In this case, Jackson National and AXA again appear as outliers at opposite ends of the chart. “AXA increased the share of variable annuity reserves reinsured by 64 percentage points as its reserve valuation increased by 12 percentage points from 2007 to 2010,” the paper said. Jackson National, with a slight drop in reserve valuation, reduced its reinsured reserves by about 45%. A half decade later, Jackson would become the VA sales leader.

Cautionary note

Are sales of VAs with GLWBs down in recent years because of declining supply or because of declining demand? Are they too expensive for most life insurers to offer or too expensive for advisors to recommend to investors? Koijen and Yogo appear to offer evidence for either interpretation.

 “The increase in fees during the financial crisis coincides with the decline in sales, suggesting an important role for a supply shock,” they write, while adding a page later: “Higher fees and lower rollup rates make variable annuities less attractive to investors, explaining the decline in sales.”

The authors conclude their article with two observations about the VA industry: First, that VA liabilities now represent a significant 34% of all life insurance company liabilities; second, that the reliance on VAs has made life insurers “more like pension fund managers because they have risky assets and guaranteed liabilities.”

Koijen and Yogo tack on a cautionary note at the end: “The persistent under-funding of pension funds may foreshadow similar problems for life insurers in the future. The fact that [some] life insurers are publicly-traded and subject to market discipline could lead to additional challenges that are not present for under-funded pension funds.”

© 2018 RIJ Publishing LLC. All rights reserved.

What’s in the latest issue of Journal of Retirement?

Posted on January 25, 2018 by -

The Journal of Retirement has released its Winter 2018 edition (Vol. 5, No. 3). As usual, the scholarly journal, published by Institutional Investor Journals and edited by George A. (Sandy) Mackenzie, contains a half-dozen or so authoritative articles by some of the most prominent academics and policy experts in the retirement field.

The latest issue features a mix of articles by familiar authors, including Mark Warshawsky, David Blanchette, John Turner, Michael Kitces, and others. Topics include safe savings rates during accumulation, safe withdrawal rates during decumulation, using term life to protect the purchasing power of a surviving spouse, comparative studies of pension systems in Hong Kong and Australia, reverse mortgages and others.  

The contents of the Winter 2018 edition of the JoR are:

“Retire on the House: The Possible Use of Reverse Mortgages to Enhance Retirement Security,” by Mark J. Warshawsky. This study asks whether reverse mortgages can be used to fill at least some of this gap. He finds that 12%–14% of all retired households are suitable for, and might sensibly use, an HECM. He concludes with proposals to lower costs, increase demand for, and encourage the use of reverse mortgages. 

“The Value of a Gamma-Efficient Portfolio,” by David Blanchett and Paul D. Kaplan. In 2014, the authors introduced gamma, a new metric designed to quantify the value of working with a financial advisor. Here, they find that the “average” investor is likely to benefit from working with an advisor who provides “comprehensive, high-quality portfolio services for a reasonable fee.” The actual benefits, they caution, will vary by investor.

“Maximum Withdrawal Rates: An Empirical and Global Perspective,” by Javier Estrada. The author evaluates different retirement strategies through a historical analysis of maximum withdrawal rates in 21 countries over 115 years with 11 asset allocations ranging from 100% stocks to 100% bonds.   

“Optimal Longevity Risk Management in the Retirement Stage of the Life Cycle,” by Koray D. Simsek, Min Jeong Kim, Woo Chang Kim and John M. Mulvey. The authors look for the optimal asset allocation for a retired couple with uncertain life expectancy using term life insurance to protect against a drop in pension income for a surviving spouse. The solution depends on the couple’s longevity risks, the relative price of insurance and the size of any cut in pension benefits.

“Blending Growth, Income, and Protection to Create Default Post-Retirement Solutions for Australia and Hong Kong,” by Lesley-Ann Morgan, Paul Marsden, Clement Yong and Sean Markowicz. After looking at case studies of pensioners in Australia and Hong Kong, two countries that have reformed their social security systems, the authors conclude that retirees need a combination of protection and growth to produce enough income for a comfortable retirement.

“Life-Cycle Earnings Curves and Safe Savings Rates,” by Derek T. Tharp and Michael E. Kitces. By assuming smooth lifetime earnings growth for workers, analysts have overstated successful retirement rates (SSRs) for lower-income households and older households while understating SSRs for higher-income households and younger households, the authors say. Using more realistic earnings curves and Social Security benefits, the authors claim that only the highest-income households need to save more than 10% per year.

“Regulating Financial Advice: The Conflicted Role of Record Keepers in Pension Rollovers,” by John A. Turner. The recordkeepers of 401(k) plans manage roughly 40% of assets rolled over to IRAs. In this article, the author shows that recordkeepers can easily reword their communications to avoid the appearance of non-fiduciary advice while still effectively influencing participants to use the recordkeeper’s IRA rollover service.

Review of The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security, by George A. (Sandy) Mackenzie. The editor of the Journal of Retirement assesses the 174-page study issued in October 2017 by the Government Accountability Office, which was based on the input of a panel of 15 retirement policy experts. 

© 2018 RIJ Publishing LLC. All rights reserved.

2017 was another big year for Vanguard funds: Cerulli

Posted on January 25, 2018 by -

Favorable market conditions and advisor sentiment about active management could lead to another year of positive active net flows, especially for strategies in which passive funds are not as competitive, according to The Cerulli Edge – U.S. Monthly Product Trends Edition for January.

Vanguard, in Bill McNabb’s final year as CEO, continued to dominate flows for all of 2017. Vanguard’s total flows for year were over $207 billion (DFA was second with $31 billion). The coming year will be Vanguard’s first under long-time heir-apparent Mortimer “Tim” Buckley.

Six out of seven of the funds with the most flows were Vanguard index funds (Total Stock Market, 500 Index, Total International Stock Market, Total Bond Market, Total Bond Market II, and Total International Bond Market).

In their first year of positive net flows since 2014, actively managed mutual funds and ETFs added net flows of $19.1 billion in 2017. Of that, $3.7 billion came from mutual funds and $15.4 billion from ETFs.

Flows into active ETFs equate to organic growth of 53%, helping boost assets to $45.2 billion at EOY 2017. On the passive side, assets closed the year above $6.6 trillion, with $3.3 trillion in mutual funds and $3.4 trillion in ETFs. Passive ETFs brought in more than $447.0 billion in 2017, up from $279.7 in 2016.

Cerulli said it expects assets managers “to continue to be selective in their product development efforts.” Here are a few more of Cerulli’s comments on various sectors of the fund market:

ESG criteria. An area of focus will be to build out new vehicle capabilities. Additionally, incorporation of environmental, social, and corporate governance factors/criteria into investment products and processes and development of strategic beta or quantitative capabilities will also be likely areas of focus.

Mutual funds. Mutual fund assets experienced growth of more than 18% during 2017, closing the year at greater than $14.6 trillion. Mutual funds reaped net flows of $249.7 billion for 2017, with taxable bond mutual funds collectively receiving the most flows of any asset class in 2017.

Exchange-traded funds. ETFs had another banner year in 2017, with assets improving 35% to more than $3.4 trillion. Net flows into the vehicle were a robust $463.2 billion, representing organic growth of 18.3%.

Liquid alternatives. The number of new open-end liquid alternative mutual fund product launches in 2017 was essentially on par with 2016. Options-based strategies led new product development activity, with 18 products launched in 2017.

Quantamentals. Within the multi-alternative and long/short equity category, there has been a growing trend of product development of quantitative strategies (factor-based with portfolio manager discretion). These strategies, often referred to as “quantamental,” attempt to combine the strength of fundamental research with quantitative investing.

© 2018 RIJ Publishing LLC. All rights reserved.

Blooom surpasses $2 billion in advised assets

Posted on January 25, 2018 by -

Blooom, the robo-advisor that aims to help 401(k) participants manage their accounts more efficiently, said this week that it has doubled its assets under management to over $2 billion less than six months after reaching the $1-billion milestone. According to CEO and co-founder Chris Costello, blooom now has more than 16,000 clients.

The company claims that its median client will save $41,456 in investment fees over their working careers. That figure is based on median blooom client 401(k) balance of $47,131, contributing  $5,000 each year, with 30 years until retirement and an average annual expense ratio reduction, based on blooom recommendations, of 34 basis points.  

Blooom has also discovered via an analysis of its accounts:

  • 79% of 401(k) participants pay hidden investment fees
  • 53% of 401(k) asset allocations were improperly aligned with retirement goals
  • 39% of 401(k) participants were invested in one or more target-date funds with an average fee 45% higher than alternative investments.

Blooom charges each participant $10 a month and is indifferent to the investment selections it recommends. Once hired, blooom picks the optimal funds in the clients’ existing 401(k)s and reallocates on their behalf. 

© 2018 RIJ Publishing LLC. All rights reserved.

Book on mandatory ‘Guaranteed Retirement Accounts’ is reissued

Posted on January 25, 2018 by -

The second edition of Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans, by economist Teresa Ghilarducci and Blackstone president Hamilton “Tony” James has just been published by Columbia University Press.

The authors elaborate on the concept of “Guaranteed Retirement Accounts” (GRAs) that Ghilarducci has called for in the U.S. GRAs have not attracted interest in Washington, D.C., however, and are unlikely to in the current political environment.   

GRAs, as proposed, would be universal, mandatory, contributory (3% of pay, split evenly between employer and employee) notional accounts in a fund that would grow under the care of professional asset managers for 40 years, then become a life annuity.     

The tax-deferred plan would not require a new tax expenditure. According to Ghilarducci, it would take the existing $100 billion tax expenditure for retirement savings in the U.S. (the annual cost of tax deferral on contributions to retirement accounts), and use it to pay for tax deferral on the mandatory contributions of all working Americans. Under the current system, the benefits of tax deferral are concentrated among those with the will, the means and the opportunity to contribute to a qualified plan.   

Representatives of the 401(k) industry have been highly critical of the plan, which could replace all or most of the private voluntary defined contribution system with what amounts to a semi-public utility. Asset managers would compete for the opportunity to manage tranches of a collective national savings fund. There would be no leakage or rollovers to IRAs.

Ghilarducci and her allies have argued that the current voluntary tax-deferred defined contribution system falls far short of meeting the retirement savings needs of all Americans, that it’s too expensive and that it doesn’t offer a route for participants to convert savings to income.

The new edition includes:

  • A new forward by former Treasury Secretary Tim Geithner
  • Focus group test results
  • Feedback on the first edition
  • A new chapter on why the plan is effective for employers  
  • The plan’s effects on deficits and taxes, according to the Tax Policy Center at The Urban Institute

The Ghilarducci-Blackstone plan has been endorsed by Michael Bloomberg and Robert Rubin. Bloomberg called the polan, “a smarter, more cost-effective way of securing the retirements of all Americans.” Rubin called the plan a “pragmatic approach to substantially enhancing retirement security for every American.” The book was first published in September 2016.

James is president and COO of Blackstone, the giant asset management firm. Ghilarducci is the Bernard L. and Irene Schwartz Professor of Economics at the New School for Social Research and the director of the Schwartz Center for Economic Policy Analysis and the New School’s Retirement Equity Lab.

Ghilarducci the author of When I’m Sixty-Four: The Plot Against Pensions and the Plan to Save Them (2008) and How to Retire with Enough Money: And How to Know What Enough is (2015).

© 2018 RIJ Publishing LLC. All rights reserved.

Spain’s Pension Outlook: Sunny with a Chance of Austerity

Posted on January 18, 2018 by -

The historic center of Seville, Spain, is a labyrinth of shaded alleys and sunlit plazas. On a mild afternoon this week, clusters of silver-haired men and women began to congregate informally at some of the countless tapas bars and sidewalk cafes that you’ll find here. 

Dressed too plainly to be tourists but too well to be unemployed, they could only be representatives of Spain’s 5.9 million pensioners. “Jubilacion” is the Spanish word for retirement and, indeed, they seemed to be enjoying what looked like a daily ritual.

As well they can. Spain has traditionally offered Europe’s second most generous state pension (after Greece). Averaging €12,000 ($13,200) per year (with a cap of around €36,000 ($43,200) per year, it replaces about 80% of final salary, on average. Retirees get 14 “monthly” checks per year.

But these are confusing times for Spanish retirees and near-retirees. The pension is changing. The government has been periodically tweaking the formulas that determine the pension payouts. With all the changes—some of which are being debated in Spain’s legislature right now—it’s hard for most people to tell if they’ll be net winners or losers.

“For most citizens facing the calculation of the pension is a real puzzle, a cumbersome issue that has been further complicated by the successive reforms of the system,” said a front-page article this week in El Pais, Spain’s biggest newspaper.

To study the Spanish retirement system, RIJ has temporarily relocated to Seville. Starting this week with a look at the public pension system (a contributory, pay-as-you-go system like Social Security in the US). Later we’ll cover workplace retirement plans (which, as in the U.S., cover about 50% of workers) and the market individual annuity contracts (which, as in the U.S., is small). 

No option to devalue

While the U.S. keeps kicking its Social Security problems down the road—to the point where our Millennials don’t expect it to “be there” for them, where the “trust fund” or reserves is about to hit empty and where payouts will drop by about 25%s in 2034 if no reforms occur—several factors have forced the Spanish to deal with theirs. 

Those factors include the crash in payroll tax revenues after the 2008-2009 financial crisis, an aging population with a low fertility rate (the median age is expected to reach 55 by 2050) and pressure from the European Union to put its fiscal house in order.     

As you may remember, Spain was one of the four Mediterranean countries (with Greece, Italy, and Portugal) hurt most (and criticized most) in the European financial crisis and real estate bust. In depressions past, these countries might have devalued their currencies, but membership in the eurozone eliminates that option.

In 2012, the Spanish government began using its Social Security Reserve Fund for current spending and debt payments, according to press reports. The reserve dropped to €15 billion in 2016 from over €66 billion in 2011. The government recently loaned €10.1 billion interest-free to Spain’s social security system, which it used to pay out the two extra pension payments due in June and December. In 2016, the system registered its biggest deficit in its history (€18.1 billion), which was covered by the reserve.

Here are some essential facts about Spain’s public sector pension:

¶ Spaniards will contribute longer to their pensions and take their pensions later. From 2013 to 2027, the official retirement age will rise to age 67 from age 65. The number of contribution years required for the minimum pension remains at 15, but the requirement for the maximum pension has risen to 38.5 from 35 and the payout will be based on salaries in 25 of those years instead of the traditional 15. The legal age for early retirement will rise to 63 from 61.

¶ Spanish workers and their employers pay a lot in taxes for their pension and healthcare benefits, which are both covered by “social security” taxes. In 2017, according to Pricewaterhouse Coopers, “The general contribution rates as from January 2017 are 6.35% for employees… and 29.90% for employers, plus a variable rate for occupational accidents (e.g., 1% for office work).” The minimum monthly base was €825.60 ($1,006) and the maximum is €3,751.20 ($4,576) in 2017.

¶ About 5.9 million people (of a population of about 46.5 million) receive a retirement pension in Spain, which is called the Pension por Jubilacion Ordinaria. In 2016 the average state pension was €1,071 or about $1,250 per month (compared with $1,369 in the U.S.) Contributory retirement pensions in Spain are Europe’s second highest (after Greece) and equal about 81% of final salary levels.

¶ The maximum pension is currently €2,573.70 ($3,140) per month, but some recipients qualify for two extra payments per year so that the annual maximum is €36,031.80 ($43,960).

¶ Spaniards can retire early as age 60 if they started working before January 1, 1967 and have they’ve contributed to the system for at least 30 years of contributions. But the pension benefit is reduced by 8% for every year of retirement before the age of 65, so the pension at 60 is 40% less than the full pension.   

¶ Delayed retirement has benefits here, as in the U.S. If someone reaches age 65 with 35 contribution years, two percentage points are added to the multiplier for every added year in employment. Those with 40 contribution years see an increase of four percentage points.

¶ Like several other European countries, Spain is adding a “sustainability factor” that will make sure that pensions don’t grow faster than resources. Starting in 2019, instead of indexing pension payouts to inflation, increases will be based on changes in life expectancy, the number of pensioners, “the level of pension payments over a duration of time, and the financial situation of the social security system,” according to pensionfundsonline. Since January 1, 2014, pensions have increased only if the system is in surplus.

© RIJ Publishing LLC. All rights reserved.

Ready or Not for the Next Recession?

Posted on January 18, 2018 by -

A sunny day is the best time to check whether the roof is watertight. For economic policymakers, the proverbial sunny day has arrived: with experts forecasting strong growth, now is the best time to check whether we are prepared for the next recession.

The answer, for the United States in particular, is a resounding no. Policymakers normally respond to recessions by cutting interest rates, reducing taxes, and boosting transfers to the unemployed and other casualties of the downturn. But the US is singularly ill-prepared, for a combination of economic and political reasons, to respond normally.

Most obviously, the US Federal Reserve’s target for the federal funds rate is still only 1.25%-1.5%. If no recession is imminent, the Fed may succeed in raising rates three times by the end of the year, to around 2%. But that would still leave little room for monetary easing in response to recessionary trends before the policy rate hits zero again.

In the last three recessions, the Fed’s cumulative interest-rate cuts have been close to five full percentage points. This time, because slow recovery has permitted only gradual normalization of interest rates, and because there appears to have been a tendency for interest rates to trend downward more generally, the Fed lacks room to react.

In principle, the Fed could launch another round of quantitative easing. In addition, at least one of US President Donald Trump’s nominees to the Federal Reserve Board has mooted the idea of negative interest rates. That said, this Fed board, with its three Trump appointees, is likely to be less activist and innovative than its predecessor. And criticism by the US Congress of any further expansion of the Fed’s balance sheet would be certain and intense.

Fiscal policy is the obvious alternative, but Congress has cut taxes at the worst possible time, leaving no room for stimulus when it is needed. Adding $1.5 trillion more to the federal debt will create an understandable reluctance to respond to a downturn with further tax cuts. As my Berkeley colleagues Christina and David Romer have shown, fiscal policy is less effective in countering recessions, and less likely to be used, when a country has already incurred a high public debt.

Instead of stimulating the economy in the next downturn, the Republicans in Congress are likely to respond perversely. As revenues fall and the deficit widens even faster, they will insist on spending cuts to return the debt trajectory to its previous path.

Congressional Republicans will most likely start with the Supplemental Nutrition Assistance Program, which provides food to low-income households. SNAP is already in their sights. They will then proceed to cut Medicare, Medicaid, and Social Security. The burden of these spending cuts will fall on hand-to-mouth consumers, who will reduce their own spending dollar for dollar, denting aggregate demand.

For their part, state governments, forced by new limits on the deductibility of state and local taxes to pare their budgets, are likely to move further in the direction of limiting the duration of unemployment benefits and the extent of their own food and nutrition assistance.

Nor will global conditions favor the US. Foreign central banks, from Europe to Japan, have similarly scant room to cut interest rates. Even after a government in Germany is finally formed, policymakers there will continue to display their characteristic reluctance to use fiscal policy. And if Germany doesn’t use its fiscal space, there will be little room for its eurozone partners to do so.

More than that, scope for the kind of international cooperation that helped to halt the 2008-2009 contraction has been destroyed by Trump’s “America First” agenda, which paints one-time allies as enemies. Other countries will work with the US government to counter the next recession only if they trust its judgment and intentions. And trust in the US may be the quantity in shortest supply.

In 2008-2009, the Fed extended dollar swap lines to foreign central banks, but came under congressional fire for “giving away” Americans’ hard-earned money. Then, at the London G20 summit in early 2009, President Barack Obama’s administration made a commitment to coordinate its fiscal stimulus with that of other governments. Today, almost a decade later, it is hard to imagine the Trump administration even showing up at an analogous meeting.

The length of an economic expansion is not a reliable predictor of when the next downturn will come. And the depth and shape of that recession will depend on the event triggering it, which is similarly uncertain. The one thing we know for sure, though, is that expansions don’t last forever. A storm will surely come, and when it does, we will be poorly prepared for the deluge. 

© 2018 Project Syndicate. 

Morningstar’s Take on Income Annuities

Posted on January 18, 2018 by -

When we think of Morningstar Inc., we think of mutual funds, not annuities. The Chicago-based aggregator of mutual fund data does publish a quarterly report on the sales of variable annuities (VAs). But VAs are, essentially, a tax-deferred extension of the mutual fund business.

So it was a little surprising and very heartening to see an article in praise of plain vanilla income annuities in the December/January issue of Morningstar magazine. Morningstar’s Canadian research chief, Paul Kaplan, wrote it as an installment of his regular Quant U column.

Kaplan wanted to illustrate, primarily through mathematical formulas, the way an typical investor going through a typical head-of-household might use insurance products to manage his or her mortality and longevity risk over what economists like to call “the lifecycle.”

“It’s kind of a walk through of some principles about mortality and longevity,” Kaplan told RIJ during a recent interview. “We all have to deal with the fact that we don’t know when we are going to die. In earlier years, if you die too soon, you want to leave your heirs something, and term life is a way to do that.

Kaplan chart

“When you get older, you have the opposite problem: You don’t know how long you will live,” he added. I kept it very simplified, to make a point. The point is that that you should use term life and payout annuities to manage the risks that you face with respect to not knowing when you would die.”

We’ll focus on the principles here, rather than the math. Kaplan (below left) imagines an abstract investor, 30 years old, who earns $50,000 a year. He or she has a bequest wish (he presumably has a family to protect) as well as a need for income in retirement (at age 60 in this case) to supplement whatever social insurance he has.

Our 30-year-old breadwinner wants his or her family to have at least $500,000 if death or disability strikes prematurely. To fund a $500,000 bequest, he starts putting money away (earning an average 4% per year) and makes up the difference between savings and the $500,000 goal with purchases of term life insurance.

Paul KaplanAs the savings grow, the investor gradually reduces his purchases of term life insurance. After 23 years, at age 53, the investor reaches a tipping point. His savings are steadily compounding toward the goal of $500,000. No longer worried about mortality risk, his or her thoughts turn to longevity risk—the risk of outliving his life expectancy (age 86) and savings.

So, at 53, he stops buying term life and starts buying a series of immediate income annuities over the next seven years—enough to reach produce a fixed income of $20,000 a year starting at age 60. During those seven years, any surplus income (from earnings, annuities or investments) goes into the savings account.

At age 60, our archetypical family-oriented investor retires from 30 years of work. He or she (and spouse perhaps) then live for an indefinite number of years on a $20,000 annuity income, earnings from the investment account and, presumably) social insurance (left out of the article for the sake of simplicity).      

“The idea is that if I have built up this half million dollars, it has returns. I can use those to fund my retirement needs. If I want additional income, that’s where the payout annuities come in,” Kaplan told RIJ.  

Real adult life, needless to say, tends to pass less smoothly than it does in this example. Lots of surprises occur along the way (like financial crises, job interruptions, illness, divorce, unexpected children and college expenses) to mess up the math. But Kaplan is interested in principles here, not case histories, and the principles ring true.   

So why is there an “annuity puzzle”? If annuities make so much sense, why don’t more people use them? “People just don’t like the scenario, ‘I go to my advisor, I put $100,000 into an immediate annuity, and I get run over by a bus.”    

But if you want to eliminate longevity risk, Kaplan said, a ladder of single premium income annuities is the right tool for the job. Sounding like a master woodworker who would never stoop to buy pre-fab cabinetry, he would rather build his own financial furniture than use a bundled product like an indexed or variable annuity with a lifetime income guarantee and death benefit. “When you use [annuities], use them in their simplest form, don’t go for a lot of bells and whistles,” he said.

With this possible exception: Kaplan likes that unicorn in the annuity family known as an IVA, or immediate variable annuity. Rarely manufactured or sold, IVA pay out a fixed number of units in retirement. Vanguard used to sell a white-label version of these products. Peng Chen, formerly of Morningstar, has demonstrated their virtues. A company called Achaean Financial has talked from time to time about issuing one.

The units of an IVA are initially valued at an AIR (assumed interest rate) of 3% to 5%, and then fluctuate in value based on the performance of the underlying investments. “When I was trying to create a model plan for an investor who faces mortality and market risk, the math just kind of made it all fall into place and I said, ‘I’m looking at an IVA.’ It works really nicely,” Kaplan told RIJ. “I’ve been interested in this for a really long time.”

© 2018 RIJ Publishing LLC. All rights reserved.

New Security Benefit deferred annuity offers floating interest rate and income rider

Posted on January 18, 2018 by -

Security Benefit Life Insurance Company has introduced a fixed deferred annuity whose floating interest crediting rate allows contract owners to benefit from a rising rate environment. The product also offers an income rider with an up-front bonus and an annual deferral bonus. The payouts can also benefit from rising rates.

The product is called RateTrack Plus Annuity (RTP). It is similar to the RateTrack Annuity that Security Benefit introduced in March 2016, but has an income rider in addition to a floating-rate crediting mechanism.

According to Security Benefit’s product literature:

When the contract is purchased, the owner receives a bonus equal to 4% of the purchase premium. The bonus is applied to the contract value and the income base on which income payments are calculated.

At purchase, Security Benefit assigns an interest rate to the contract and guarantees that rate for five years. The contract owner receives that rate plus a floating rate, the 3-month ICE LIBOR USD Rate, which has historically closely tracked the Federal Funds Rate.

The 3-Month ICE LIBOR USD Rate is set at issue for the first contract year, then every anniversary using the prior business day’s LIBOR rate. It is subject to a cap. After the fifth contract year, Security Benefit will declare an interest rate that is subject to change annually.

The combined interest rate is also used to enhance the annual “roll-up” or deferral bonus of the income benefit base. The income benefit base grows each year by to 3% plus twice the credited interest rate (Security Benefit’s rate plus the 3-Month ICE LIBOR USD rate). The Income Benefit is automatically included with the purchase of the RateTrack Plus annuity.

Each year the owner delays taking income, the income benefit base increases by the roll-up rate until the 10th contract anniversary, the income start date, or the oldest owner’s 85th birthday, whichever comes first.

The longer the contract owner delays income, the higher the annual withdrawal rate. At age 50, the withdrawal rate is 3.60% of the income benefit base per year for single men, 3.40% for single women and 2.90% for couples. In each subsequent year, until age 90, each of those rates increases by one-tenth of one percentage point.

If, after purchase, the contract owners become unable to perform at least two of the six basic activities of daily living (ADLs), they can double the regular income under the rider for up to three contract years. After that they will receive the regular amount.

The contract has a minimum purchase payment of $25,000. Withdrawals in excess of 10% of the contract value during the first 10 years of the contract are assessed a surrender penalty starting at either 12%, 10% or 9%, depending on the state of issue, and a 10% per year reduction in the 4% bonus granted at time of purchase.

© 2018 RIJ Publishing LLC. All rights reserved. 

IRAs now account for 25% of retirement savings: EBRI

Posted on January 18, 2018 by -

With more assets than 401(k) plans, the IRA market keeps growing in importance for the financial industry. To help manufacturers, distributors, academics and regulators understand this market, the Employee Benefits Research Institute (EBRI) created an IRA database to analyze the status of the market and individual behavior in IRAs.

EBRI has just published its fourth annual IRA database study of longitudinal changes in IRAs, which supplements its annual cross-sectional analyses. In a new Issue Brief based on the IRA Database, EBRI examines the trends in account balances, contributions, withdrawals, and asset allocation in IRAs from 2010‒2015.  

In contrast to 401(k) plan participants, few IRA owners make regular contributions. For instance, almost 90% of Traditional IRA owners and about 60% of Roth IRA owners made no contributions at all during the six-year period of the study.

The average balance for all IRAs grew by about 50% during the 2010-2015 time frame, to about $146,000. People 70 years old and older had the highest average ($229,000) and median ($81,000) balances. Few people take withdrawals from IRAs until they reach age 70½, when annual taxable distributions become mandatory.

EBRI estimates that IRAs hold 25% of America’s $29.1 trillion in retirement savings. State and local government pensions account for about 20%, private defined contribution plans for 19%, federal government plans for 13%, private insurance contracts for 12%, and private defined benefit plans for 11%.

Highlights from the EBRI Issue Brief are summarized below. 

The overall average balance increased 36.1% from 2010 to 2015, while the balances for IRA owners who continuously owned IRAs increased 47.1% over that time period. Growth varied from an average of less than 0.1% (the lowest quartile) to 87.3% (the highest quartile). For consistent Roth IRA owners, the lowest quartile of balance increases for IRAs was 29.7%, and the highest quartile was more than 117.3%.

The overall average balance increased for consistent owners each year—from $99,603 in 2010 to $99,960 in 2011, to $113,564 in 2012, to $134,781 in 2013, to $146,308, in 2014, and to $146,513 in 2015. Average balances for each gender also increased each year. The median values also increased for all IRA owner groups except for those ages 65 or older.

Among Traditional IRA owners, 87.2% did not contribute to the IRA in any year, while 1.8% contributed in all six years. In contrast, 60.1% of Roth IRA owners did not contribute in any year and 9.7% contributed in all six years.

Roth IRA owners ages 25‒29 were the most likely to contribute in any year at 64.1%, and Roth IRA owners ages 30‒ 34 were most likely to contribute in all six years at 15.0%.

The percentage of contributors who contributed the maximum amount rose from 43.5% in 2010 to 53.5% in 2012. Increases during that time occurred for each IRA type, with owners of Traditional IRAs more likely to contribute the maximum in each year.

In 2013, when the limit on allowable contributions increased, the percentage who contributed the maximum fell from 53.5% in 2012 to 43.3% in 2013. Similar percentage-point drops occurred for both Traditional and Roth IRAs. In 2014, the likelihood of contributing the maximum among those who contributed increased again, reaching 55.4%, before a slight decline in 2015 to 54.4%.

In 2010, the average contribution was $3,335, increasing to $3,723 in 2011, to $3,904 in 2012, and to $4,145 in 2013, before declining to $4,119 in 2014 and increasing to $4,169.  

For the annual cross-sectional snapshot, the percentage allocated to equities decreased from 45.7% in 2010 to 44.4% in 2011 before a sharp increase in 2012 to 52.1%, subsequent increases to 54.7% in 2013, and to 55.7% in 2014, then a decline in 2015 to 54.7%.

The amount allocated to balanced funds was constant from 2010 to 2011 before a slight decline in 2012 and an even smaller uptick in 2013, 2014, and 2015. The percentage in money increased in 2011 and fell through 2014 before leveling off in 2015.

The share of assets allocated to equities in 2010 was 44.5% and 46.4% in 2012, with a decline to 44.2% in 2011. However, after 2012, the percentage allocated to equities increased, reaching 53.1% in 2014, before a slight retrenchment in 2015 to 52.6%. The percentages allocated to bonds, money, and other assets all fell from 2010 to 2015, while the percentage allocated to balanced funds inched upward.

About 27% of consistent IRA owners had zero percent allocated to equities in 2010 and 2015. Almost 17% had 100% allocated to equities in both years.

Among consistent account owners, 14.6% took a withdrawal from a Traditional or Roth IRA in 2010, 18.4% in 2011, 19.6% in 2012, 21.0% in 2013, 22.6% in 2014, and 23.8% in 2015.

The percentage of consistent account owners ages 71–79 in 2015 who took a withdrawal increased to 80.5% in 2015 from 34.4% in 2010. This reflected the increasing percentage of individuals in this sample surpassing the required-minimum-distribution (RMD) age each year. Moreover, the likelihood of taking a withdrawal increased with age.

© 2018 RIJ Publishing LLC. All rights reserved.

The Elusive ROI of Financial Wellness Efforts

Posted on January 11, 2018 by -

Financial un-wellness haunts the American workplace. On concrete factory floors and carpeted office hallways across our land, debt-anxiety and a lack of adequate savings distracts young workers from their jobs and prevents older workers from retiring. The result: declining productivity.

Or so we’re told. A snow-capped mountain of white papers from think tanks (Aspen Institute), government agencies (CFPB) and consulting firms (Deloitte, Aon, Mercer, Pricewaterhouse Coopers) has accumulated in recent years. All agree that about a quarter of U.S. workers are so stressed about their finances that it hurts their on-the-job performance and employers’ bottom lines.R Crumb Despair

“Financial wellness” programs (or, for brevity, FW) are said to be the solution. These are web-based or in-person training programs, delivered during the workday or off-hours, either as part of traditional 401(k) “participant education” or separately. They can be free (i.e., part of the recordkeeping services bundle), or be expensed separately.

Often, they consist of interactive videos that ask employees a series of assessment-type questions and then direct them to the tutorials on retirement, or debt consolidation, or health care savings accounts. The goal is to train employees to use their existing salary and benefits more efficiently.

Retirement plan providers have jumped all over this trend. Full-service and advisor-sold firms like MassMutual, Voya, Vanguard, Fidelity, Principal, and Empower have all created FW programs, either homegrown or subcontracted to a myriad of new vendors. Providers at first saw FW capability as a competitive edge; in the past two year it has become a necessity.       

But proving that FW programs pay for themselves is a big challenge. The devil as usual, is in the metrics. To get funding for FW, HR executives need to convince often skeptical CFOs that FW will result in bigger 401(k) contributions, less leakage from 401(k) plans, greater usage of health savings accounts, less absenteeism, higher average productivity, and less “deadwood,” as superannuated employees were once uncharitably called. For that ROI data, HR folks turn to the providers and consultants. 

Cost-benefit studies

The biggest source of savings may be a reduction in absenteeism. That factoid comes from Financial Finesse, an El Segundo, Calif.-based FW firm founded in 1999 by former investment banker Liz Davidson (below right). The 50-employee firm, Davidson told RIJ recently, serves about 52 large companies directly and about 600 companies indirectly by contracting with plan advisors or providers.

Interestingly, Financial Finesse works with current and former NFL players. “We help them find advisors. We show them how to make their 17-week paychecks last a whole year and how much to save for the long-term,” Davidson told RIJ. The agents are often the ones who call us first. It’s not unusual for us to have an agent, a rookie player, and the player’s mom on the phone at the same time.”Liz Davidson

Depending on the specific program, plan sponsors pay Financial Finesse annual fees for ongoing assessment, daily fees for workshop presentations and per capita fees for personal financial coaching. The services come with a performance guarantee that ties the expense to measurable improvements. “We’re on the line for results,” Davidson said. “For our relationships to grow, and for HR departments to increase budgets for FW, it comes down to the quality of our analysis.”

In 2016, Financial Finesse’s in-house think tank published a white paper on the return-on-investments in FW programs. It described the FW interventions at an unnamed Fortune 100 company over the five-year period from 2009 to 2014. Financial Fitness assessed all of the workers and assigned each to one of five categories according to their “Financial Wellness Scores.” 

Employees went through a variety of training programs, depending on their specific level or type of financial distress. For the most afflicted, the priority may have been to eliminate wage garnishment or credit card debt. For the healthiest, the first step might be to increase deferral rates to retirement plans. Periodic re-assessments showed whether the employees’ scores have improved.

Financial Finesse assigned the employees to one of five quintiles of financial wellness, ranked from lowest to highest. In this company, 13% of workers were in the lowest quintile, while 35%, 34%, 15% and 3% were in the second, third, fourth and highest quintiles, and their estimated annual cost to the employer averaged $198, $94, $0, -$82 and -$143, respectively. Almost half the workforce (48%) was defined as either “suffering” (the lowest quintile) or “struggling” (the second lowest).

Based on those metrics, Financial Finesse estimated that raising the company’s average financial wellness to a score of 5 from a score of 4 would save the firm about $50 per employee. An increase to 6 from 4 would result in an estimated annual savings of about $100 per employee, the study showed, or about $1 million for a 10,000-person company. About 80% of the savings came from reduced absenteeism.  

MassMutual’s ‘Viability’ software

MassMutual has a patent-pending software program called Viability that it claims can quantify the impact of FW programs. The mutual life insurer and provider of advisor-sold retirement plans bought Viability Advisory Group two years ago. Its creator, former MassMutual executive Hugh O’Toole, rejoined the insurer to run its FW business.

Since MassMutual’s 30,000 plans (many of them under $15 million, thanks to its 2012 acquisition of the Hartford’s retirement business) are initially sold to plan sponsors by advisors, MassMutual markets Viability to plan advisors. Viability works in conjunction with two of MassMutual’s FW interventions: Mapmybenefits and Beneclick! (from Maxwell Health).      

Hugh O'TooleMassMutual declined to explain exactly how Viability works. The Viability website tells advisors: “Now you can show them—really show them, with actual numbers” about the savings from FW programs. “If an employer will give us their data, we can run the numbers to show them the liability they create for themselves by not helping their employees retire at their normal retirement age.”

O’Toole (left) believes that FW might divert 401(k) contributions into rainy-day accounts, health insurance accounts and debt-reduction programs, but he thinks that each employee has different priorities, depending on their age and circumstances.

“It’s heresy in the retirement industry to say this, but making sure an employee can afford the deductible on a high-deductible health saving account, or making sure they have some basic life insurance is probably a better utilization of their limited benefit dollar than recommending that that employee puts 10% of their pay into their 401(k) plan,” he told RIJ in an interview.

Garman’s estimates

More than 20 years ago, a personal financial planning specialist at Virginia Tech University, E. Thomas Garman, produced hard estimates of the costs of financial stress in the workplace. In this graphic, for instance, he maps out the elements of financial un-wellness that cost employers money and estimates a $3 return for every $1 invested in “workplace financial education and assistance programs.”     

Garman, who founded the Personal Finance Employee Education Foundation in 2006, has also cited the following rules of thumb for estimating the savings from FW programs: 

“Take the 10% of the workforce which is currently experiencing financial problems and multiply that by a 10% average annual wage loss in employee productivity; that equals the cost of an employer doing nothing. For example, consider an employer of 1,000 employees with an average wage of $30,000 who has 100 workers experiencing financial problems to the extent that their productivity is reduced by 10%.

“That calculates to $300,000 in annual lost productivity ($30,000 [annual employee wage] X .10) = $3,000 per financially troubled employee] times 100 [current number of financially troubled employees]). This $300,000 annual productivity loss for an employer with 1,000 employees is a conservative estimate.”

Prevalence and skepticism

Are CFOs heeding the call to FW? At a recent SPARK conference for recordkeepers, Michael Kozemchak, a managing director at Institutional Investment Consulting, said that the push for FW is still coming from the human resources department, without necessarily a lot of pull from CFOs.

“The interest is coming from the HR department. They meet with benefits consultants who are talking about it and showing them data. If the data looks compelling then the matter percolates up to the senior managers. If it looks compelling to senior managers then they might do something about it,” Kozemchak told RIJ.

AonHewitt, in a 2017 report called “Hot Topics in Retirement and Financial Well-Being,” estimated that “60% of employers feel [FW’s] importance has increased at their organization over the last 24 months,” with 59% of employers “very likely” and 33% “moderately likely” to “focus on the financial wellbeing of workers in ways that extend beyond retirement decisions.”

The same report said that 49% of companies “are still in the process of creating their financial well-being strategy, but that is not stopping them from offering tools, services, and educational campaigns on various financial matters to their workforces. As of the beginning of [2016], 58% of employers have a tool available to workers covering at least one aspect of financial wellbeing. By the end of the year, the percentage is expected to climb to 84%.”Jack Towarnicky

Some plan sponsors are said to worry that FW programs might open the door to unwanted sales overtures to employees. There are also skeptics who believe that 401(k) plans themselves are flexible enough to provide employees with all the remedies they might seek from an FW plan.

That’s a view held by Jack Towarnicky (right), an attorney and former benefits executive who is currently the president of the Plan Sponsor Council of America (formerly the Profit-Sharing Council of America).

Towarnicky sees little need to create a new benefits overlay at the worksite. “My financial wellness solution is the 401(k),” he told RIJ. “The better answer is to educate folks within the 401(k) plan, and how it can be used to meet short, medium and long-term financial objectives.” If people learn leveraging the tax advantages of retirement plans and health savings accounts, he believes, financial wellness will follow.

A cynic might say that FW programs are at best superficial or palliative remedies for a deeper problem: the decades-long shrinkage in total compensation for all but the upper quintile of the income spectrum, and the “great risk shift” of financial responsibilities from employers to workers.

But at least one observer believed that it’s worthwhile to improve employee morale, reduce stress and raise efficiency here and there, even if you don’t save the world. “The whole thing is about efficiency,” said Betsy Dill, the head of financial wellness at Mercer.

“We’ve done analyses at dozens of employers and seen time and time again that employees are spending money on benefits in non-advantageous ways. About 25% are making the right decisions, but maybe 75% don’t. When you show someone how to use benefits the right way, it can put real money back into their pockets or into their retirement plan.” And make the workplace a bit less haunted by financial un-wellness.

© 2018 RIJ Publishing LLC. All rights reserved.

 

How Demand-Siders See the New Tax Law

Posted on January 11, 2018 by -

US President Donald Trump and congressional Republicans had an opportunity—and a responsibility—to reform the US tax code to address three major economic challenges: slowing growth, rising inequality, and a looming fiscal crisis. Sadly, they shirked their responsibility by passing a bill that squandered this opportunity.

At a time when US public debt as a share of GDP is already at a post-war high, the legislation will add another $1.5-2.2 trillion to the deficit over the next decade. At a time when income and wealth inequality is soaring, an estimated 80% of the tax cuts will go to the top 1% by 2027. And at a time when the economy has been growing steadily for 33 quarters and is approaching full employment, the legislation will have only a modest effect on growth.

To be sure, a significant cut in the corporate tax rate was long overdue. The legislation will likely stimulate investment and encourage domestic and foreign companies to do business in the United States. But, by an overwhelming majority, economists predict that the increase in the growth rate will fall far short of the annual gain of one percentage point (or more) hyped by Trump and his economic advisers.

Moreover, there is no credible evidence to support the Trump administration’s declaration that the trickle-down benefits of faster growth will “increase average household income in the United States by, very conservatively, $4,000 annually.” A large body of economic research shows that, at most, 20-25% of the benefits of corporate tax cuts will accrue to labor; the rest will go to shareholders, about one-third of whom are foreign. The biggest beneficiaries will be the top 1% of domestic households that own about half of outstanding shares.

Nor is there evidence to support the administration’s claim that the legislation will pay for itself. As many of those who voted for it well know, the expected gains in growth will yield at most about one-third of lost revenues. But they are playing a cynical game. By reducing revenues now, they will be in a position to justify cuts to services benefiting lower- and middle-class Americans down the road—all in the name of “fiscal responsibility” and “entitlement reform.”

Worse yet, the tax legislation is riddled with provisions that will dramatically increase inequality and limit economic and social mobility. By cutting the top income-tax rate, doubling the threshold at which inheritances are taxed, and lowering taxes on pass-through businesses, the legislation amounts to a handout for the wealthy, paid for by the middle class and future generations.

The legislation also prioritizes investment in physical and financial capital over what the US really needs: more investment in human capital and lifelong learning to help workers and communities cope with the disruptive effects of automation and artificial intelligence. Instead of expanding the earned income tax credit to encourage work, the legislation will, for the first time in American history, impose a higher tax rate on employment income than on income earned by proprietors and partnerships.

In addition, the legislation is an unabashedly partisan attack on Democratic-leaning states and cities. For example, the bill imposes an across-the-board limit on mortgage deductions, which will have a disproportionately adverse effect on people living in high-cost Democratic strongholds such as New York and California. Currently, the median price for a home in San Francisco is $1.5 million; in Kansas, a reliably Republican state, it is $187,000.

And if that weren’t bad enough, the bill intentionally penalizes higher-tax states like California and New York, by capping the federal deduction for state and local income and property taxes. Ironically, this provision will hurt growth, by raising the marginal tax rate on millions of workers in the country’s most productive locales and industries. And it will make it harder for state and local governments to finance necessary investments in innovation, infrastructure, and higher education—investments that are largely the states’ responsibility but are pillars of overall US competitiveness.

A majority of Americans already recognize that the tax law is deeply flawed and full of false promises. After failing to repeal the Affordable Care Act (Obamacare), congressional Republicans rammed through a complicated tax package that will please their wealthy donors, but disappoint many of their voters. Given the tax law’s unpopularity, it will be interesting to see what happens in the midterm congressional elections this November.

In the meantime, progressive federalists in forward-looking states and cities must get to work picking up the pieces of the wreckage the federal government is leaving in its wake. Keep an eye out for the many ways states will re-orient their tax regimes away from income taxes, and toward property and sales taxes, including on services, which account for more than 70% of economic activity but have traditionally been taxed lightly at the state and local level.

In some states, there is even talk of reclassifying state taxes so that they qualify as tax-deductible charitable contributions. Similarly, some have proposed replacing state income taxes with payroll taxes that employers can deduct at the federal level. Keep an eye out as well for a sizeable increase in outcome-oriented state and local funding for efforts to reduce homelessness and reform the criminal-justice system.

Owing to its high marginal income tax rates and constraints on residential property taxes, California will likely be at the forefront of fiscal innovation. Already, multiple reform proposals are circulating, including a ballot initiative to amend Proposition 13 that would dramatically ease existing restrictions on commercial-property taxes. And with the Democrats in full control of the state’s government, measures to counteract the federal law are almost certain to be adopted.

California Governor Jerry Brown, for his part, has called the Republicans’ legislation a “tax monstrosity.” He’s right: it’s dreadful policy. Other countries that have reduced taxes on mobile corporate capital have paid for the cuts by increasing value-added taxes and taxes on carbon, dividends, capital gains, and inheritances. Trump and the Republicans, by contrast, chose to cut taxes on both businesses and their owners, while blowing an unsustainable hole in the federal budget, exacerbating inequality, and imposing new burdens on the most productive parts of the country.

Still, necessity is the mother of invention. For progressive federalists in US cities and states—the laboratories of democracy—it is now more necessary than ever to step up and start innovating.

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, and a senior adviser at the Rock Creek Group. Lenny Mendonca, Senior Fellow at the Presidio Institute, is Senior Partner Emeritus at McKinsey & Company.

© 2018 Project-Syndicate.

New DIY decumulation software from team of Meyer and Reichenstein

Posted on January 11, 2018 by -

IncomeStrategy.com, a maker of specialized software “for retirees who want to actively manage their finances and potentially add years to their retirement,” has just been launched by Retiree Inc., a company founded by Bill Meyer, the CEO of Social Security Solutions.

“Ten years in the making, incorporating the latest tax code and social security calculations, Income Strategy goes far beyond currently available retirement ‘calculators.’ Income Strategy is completely independent, and does not sell products like annuities,” Meyer said in a release.

“The financial services industry has focused almost entirely on accumulation, but has failed to solve the drawdown problem for retirees.” said Retiree, Inc., founder and CEO, Bill Meyer, who is also CEO of Social Security Solutions, Inc. and creator of the successful suite of Social Security Solutions tools.

“Our research proves that conventional approaches to retirement savings are inadequate and often result in gross miscalculations about drawdown potential. We created IncomeStrategy.com for pre-retirees and retirees who want to be actively involved in getting the most of what they have, and stretching their retirement income. We are addressing a critical gap in retirement planning with the technology and research to help retirees take a more thoughtful, coordinated approach to generating the income they need.”

Author and speaker William Reichenstein, a professor at Baylor University and head of research for Retiree Inc. and Social Security Solutions, conducted the research behind the software. Income Strategy is intended to help Boomers by:

  • Dynamically calculating optimal withdrawal strategy throughout retirement
  • Coordinating a drawdown strategy while optimizing Social Security benefits
  • Providing a “get cash’ button that tells where and how to “tap” savings
  • Leveraging asset location and rebalancing of portfolios
  • Minimizing tax liability and Medicare premiums
  • Using Roth conversions and recharacterizations

“We developed an easy to use calculator that will estimate your personal “GET MORE” amount in less than five minutes,” said Meyer. Retirees and pre-retirees can input their numbers and see how much longer their money will last by requesting a QuickStart Report. Depending on the situation, Income Strategy shows retirees how to make their money last up to 2 to 10 years longer.

Income Strategy is offered at several price and service tiers:

Basic. ($20 per month). Access to three core modules within the software, and an option to access a retirement income expert for $125 an hour.

Premier. ($50 per month). Access to three core modules, with premium income strategies and industry leading model portfolios developed by Dr. Reichenstein. It also includes the option to access a retirement income expert for $125 per hour.

Premier Bundle. ($1,500 per year) Includes the full benefits of the Premier subscription, and a special one-hour training session to get you started, up to three complimentary consultation sessions, free Social Security filing services and a $300 savings when compared to 12 months of Premier subscription.

Financial Advice Package: Includes our full-service registered investment advisory and we manage all the details for you. Basis points pricing is offered at a tiered level determined by the assets in your household. Up to $1M = 80 basis points, $1M-$3M = 70 basis points, and $3M+ = 50 basis points.

© 2018 RIJ Publishing LLC. All rights reserved.