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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.

German workers adjust to retirement plans without guarantees

Posted on January 11, 2018 by -

Like the U.S., Germany is struggling to expand the coverage ratio of workplace retirement plans. An estimated 43% of German workers work in companies that don’t offer either a defined benefit or defined contribution pension. They face retirement with only the state pension, which is gradually shrinking.

A new German labor law (the “Betriebsrentenstärkungsgesetz,” or BRSG), effective January 1, addresses that problem by allowing unions and employers to set up US-style defined contribution plans. The plans are easy to set up, but offer no investment guarantees for workers or income guarantees for retirees. For workers accustomed to defined benefit plans, that feels uncomfortable.

There’s no question that Germany needs more workplace plans. Only a third (34%) of Germans between ages 14 to 29 say they trust the state pension to provide enough for them in retirement, but 61% have faith in workplace pension plans, according to a November survey by Germany’s largest multi-employer pension plan, MetallRente.

Among the 1,000 surveyed individuals of all age groups, 48% trusted the state pension and 56% trusted occupational pensions. The survey also provided a boost for Germany’s new pension law, the BRSG, which came into effect on 1 January.

Just over half of the young people surveyed trusted pension plans that were set up jointly by employers and employee representatives, known as the Tarifparteien. Under the BRSG, the Tarifparteien of each industry can now set up pension plans without guarantees but with a “defined ambition” goal.

The new law represents the first time German law has supported pension funds without guaranteed retirement incomes. For that reason, the new law was and remains extremely controversial within the trade unions, according to a bulletin from the European Social Policy Network (ESPN), part of the European Commission, published last July.

Attitudes towards defined contribution plans vary considerably among Germans workers, who just now adjusting to the shift in pension risk to workers from employers.

“On the one hand, the exclusion of any performance guarantees may expand the investment opportunities in global stock markets in a low-interest rate environment. On the other hand, employees have no certainty about the eventual value of their occupational pensions. Even the risk of losses cannot be excluded,” the ESPN bulletin said.

© 2018 RIJ Publishing LLC. All rights reserved.

Former New York Life executive Chris Blunt joins Blackstone

Posted on January 11, 2018 by -

Chris Blunt, former president of New York Life’s Investments Group, will join Blackstone as a senior managing director and CEO of Blackstone Insurance Solutions, a new business unit that will market Blackstone’s investment management products and services to insurance companies, according to a Blackstone release.

Blackstone Insurance Solutions partners with insurers to deliver customizable and diversified portfolios of Blackstone products across asset classes, as well as the option for full management of insurance companies’ investment portfolios.

Affiliates of Blackstone recently entered into an investment agreement with Fidelity & Guaranty Life, where Blackstone Insurance Solutions currently oversees $22 billion in assets under management. In addition, Blackstone in partnership with AXIS Capital established Harrington Reinsurance, a property & casualty reinsurance company, in July 2016 and currently manages all general account assets.

Mr. Blunt joins Blackstone after 13 years at New York Life, where he most recently served as president of the Investments Group. In that role, he was responsible for NYL Investors, New York Life Investment Management (NYLIM), Retail Annuities, Institutional Annuities and Seguros Monterrey New York Life, with combined assets under management of more than $500 billion. He was previously co-president of New York Life’s Insurance & Agency group, the company’s largest operating division, and held senior roles within the Retirement Income Security, Life & Annuity and MainStay Investments divisions.

Before joining New York Life, Mr. Blunt worked at Merrill Lynch Investment Managers, Goldman Sachs Asset Management, and a number of other financial institutions. He holds an M.B.A. in Finance from The Wharton School, University of Pennsylvania, and a B.A. from the University of Michigan.

© 2018 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on January 11, 2018 by -

RetireUp Acquires RepPro

RetireUp, a retirement planning software for financial advisors, today announced the acquisition of their strategic partner, RepPro, a smart-forms and digital business execution platform. This acquisition follows the companies’  launch of RetireUp Pro, an end-to-end retirement income planning platform that elevates the client experience from start to finish, while helping advisors accelerate their business. The joint company will assume the RetireUp brand, headquartered in Chicago, IL.

Founded in 2012 by financial advisors, RetireUp provides thousands of financial advisors in the U.S. with a web-based retirement planning tool which uses charts and graphs to simplify complex financial concepts, “big-picture” visuals that engage clients so they can create personalized income plans within 30 minutes.

Users of RetireUp Pro can access RepPro’s automated smart-forms and business logic, which uses data integration and a fully automated filing system to expedite administrative tasks while reducing human error. As a result of the merger, Patrick Kelly, RepPro Co-Founder and CEO, will assume the role of executive vice president, Business Development, of RetireUp.

Northwestern Mutual takes a stake in ClientWise

Northwestern Mutual has become a majority investor in ClientWise, a business and executive coaching and consulting firm working exclusively with financial professionals, the life insurer announced this week.

ClientWise, led by founder and CEO Ray Sclafani, will continue to operate as an independent firm, while partnering closely with Northwestern Mutual to coach, develop and grow the businesses of Northwestern Mutual’s financial advisors.

Northwestern Mutual’s investment will enable ClientWise to embark on next-level strategic growth itself, including continuing to innovate and develop practice management tools and resources, and allowing it to create scale to provide value to more leading financial professionals and their firms, and support best practices in the advice industry at large.

This announcement is a continuation of Northwestern Mutual’s efforts to invest in and partner with innovative firms to bring greater value to its financial advisors and clients. It follows the acquisition of LearnVest in 2015, and the subsequent launch of the Northwestern Mutual Future Ventures Fund for strategic investing. Silver Lane Advisors acted as financial advisors to ClientWise for this transaction.

Northwestern Mutual hires Brissette

Lori Brissette has been appointed vice president of insurance and annuities client services at Northwestern Mutual, effective January 2, 2018. She will lead the insurance products and client services team, said John Schlifske, chairman and CEO, Northwestern Mutual, in a release.

Brissette spent the past seven years with USAA in San Antonio, Texas, where she most recently served as assistant vice president, USAA Protection Experience. She helped develop and lead a new corporate strategy and operating model at USAA.

Prior to joining USAA, Brissette led a law firm that provided services to financial security companies. She also served as an elected district judge for the State of Texas. Brissette earned her B.A. degree from the University of Texas at Austin and her J.D. from South Texas College of Law.

Eversheds Sutherland forms charity to assist US employees

Eversheds Sutherland (US) LLP has formed the Eversheds Sutherland Employee Relief Fund, a 501(c)(3) charitable organization dedicated to assisting US employees and their families impacted by natural disasters, injury or illness, or personal disasters such as a house fire that cannot be adequately dealt with through personal resources, insurance or public programs (such as FEMA or the Red Cross).

The relief fund was created with the financial support of Eversheds Sutherland, and is also funded by partners and employees, who have the ability to donate a discretionary monetary amount through payroll deduction. The board of directors includes both partners and employees of Eversheds Sutherland with representation from all US offices, and is led by US Pro Bono Partner John H. Fleming. The relief fund is currently applying for its determination letter from the Internal Revenue Service.

Two real estate specialists rejoin Ernst & Young

Ernst & Young LLP (EY) announced today that the principals and employees of RPR Partners, LLP, including RPR founders and co-directors Robert P. Regnery and Kenneth R. Van Damme II, have joined the EY Private Client Services practice, based in San Diego.

Both men are previous EY professionals who are returning to the firm from their independent tax advisory practice. The new team expands EY’s resources of private client service and real estate professionals, according to an EY release.

Based in Southern California, RPR Partners focuses on wealth management for individuals and family businesses involved in real estate. After nearly ten years with the real estate practices of EY and Kenneth Leventhal, Regnery joined Peterson & Co where he led both the Real Estate Group and the Entrepreneurial Services Group before forming RPR Partners with Van Damme.

Van Damme has more than 27 years of tax advisory experience in the real estate industry and with high net worth individuals. Prior to forming RPR Partners, he had been EY’s real estate tax compliance practice area leader for Southern California, and also served as an adjunct professor at San Diego State University teaching real estate finance and taxation.

Research on risk-taking wins TIAA Institute award

Economists John Beshears, David Laibson, and Brigitte Madrian of Harvard University and James Choi of Yale University have won the 22nd Annual TIAA Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security, the TIAA Institute announced this week.

The Samuelson Award recognizes outstanding research that the private and public sectors can use to maintain and enhance Americans’ financial well­-being.

The researchers were awarded for their paper, “Does Aggregated Returns Disclosure Increase Portfolio Risk­-Taking?” which examines previous studies’ findings that participants take more investment risks if they see returns less frequently, see portfolio-level returns, or see long ­horizon historical distributions. The authors offer a different perspective that challenges what has been widely accepted about how investor behaviors and disclosure policies impact risk taking.

© 2018 RIJ Publishing LLC. All rights reserved.

That Confusing ‘Pass-Through’ Provision

Posted on January 11, 2018 by -

Among the most complex provisions of the Tax Cuts and Jobs Act (TCJA) is its special tax deduction for pass-through businesses. In an attempt to prevent the new tax break from turning into a run on the Treasury, Congress created a set of complicated “guardrails” to limit its use.

Almost all tax experts agree that many businesses will need to consult tax lawyers and accountants for years to come, with perhaps millions changing their form of ownership. Some taxpayers will also create multiple layers of corporations, partnerships and other pass-through businesses, with varying degrees of ownership, to minimize their tax burden.

Yet, the official “complexity analysis” that accompanies the just-passed TCJA falls far short of telling the real story of how challenging this provision will be for many business owners.

In 1998, a Republican Congress required the staff of the Joint Committee on Taxation, in consultation with the Internal Revenue Service and the Treasury Department, to provide a tax complexity analysis “for all legislation reported by the Senate Committee on Finance, the House Committee on Ways and Means, or any committee of conference…that…has widespread applicability to individuals and small businesses.” The analysis is supposed to include added costs and additional recordkeeping for taxpayers and the need for regulatory guidance.

As required, JCT did produce such an analysis just before the House passed the TCJA and again just before Congress adopted a final bill. But because Congress insisted on producing the TCJA in less than two months, JCT, IRS, and Treasury were overwhelmed with the other work and simply did not complete a proper complexity analysis. The pass-through provisions are the most striking example of this failure.

Some provisions of the new law attempt to deter workers from converting themselves into a business or independent contractor to benefit from this tax break. Others attempt to separate “owners” from “workers” even when both make the same amount of money from the same partnership. Limits are placed on “personal service” companies. Other limits are based on taxable income or wages paid.

Meanwhile, because Congress created a new corporate tax rate that is significantly lower than the individual income tax rate, businesses must make a series of choices to decide whether to organize as pass-throughs at all. The analysis says the provision will affect “over 10% of small business tax returns.” But a number between 10% and 100% is not very informative.

Notwithstanding all those issues, here is JCT’s full analysis:

It is estimated that the provision will affect over ten percent of small business tax returns. It is not anticipated that individuals will need to keep additional records due to the provision. It should not result in an increase in disputes with the IRS, nor will regulatory guidance be necessary to implement this provision.

It may, however, increase the number of questions that taxpayers ask the IRS, such as how to calculate qualified business income and how to apply the phase-ins of the W–2 wage (or W–2 wage and capital) limit and of the exclusion of service business income in the case of taxpayers with taxable income exceeding the threshold amount of $157,500 (twice that amount or $315,000 in the case of a joint return), indexed.

This increased volume of questions could have an adverse impact on other elements of IRS’s operation, such as the levels of taxpayer service. The provision should not increase the tax preparation costs for most individuals.

The IRS will need to add to the individual income tax forms package a new worksheet so that taxpayers can calculate their qualified business income, as well as the phase-ins. This worksheet will require a series of calculations.

The analysis asserts that “[i]t is not anticipated that individuals will need to keep additional records” and “[i]t should not result in an increase in disputes with the IRS nor will regulatory guidance be necessary.”

This seems implausible at best. Its claim that “[t]he provision should not increase the tax preparation costs for most individuals” is downright misleading. Since most individuals are not business owners, it is self-evident that their costs won’t increase due to this provision.

But the real question, which the analysis does not answer, is what about those individuals who are business owners? Perhaps most importantly, the analysis is silent on the required planning “costs to taxpayers” that nearly always exceed those associated simply with filing tax returns.

As a former Treasury official, I greatly respect those nonpartisan offices that serve the public so well, such as the JCT and the Treasury’s Office of Tax Policy. I once dedicated a book to IRS personnel, who do the thankless task of reducing the share of the taxes borne by honest taxpayers. So, I do not make this criticism lightly.

In this case, these agencies have more work to do to fulfill the spirit of the law, not just its letter. More important, Congress needs to legislate in a way that allows staff to fulfill the 1998 mandate.

(Thanks to Robert Pear of The New York Times, who first asked me about the House bill’s complexity analysis.)

© 2018 The Urban Institute.

Why Low Inflation Is No Surprise

Posted on January 4, 2018 by -

The fact that inflation has remained stubbornly low across the global North has come as a surprise to many economic observers. In September, the always sharp and thoughtful Nouriel Roubini of New York University attributed this trend to positive shocks to aggregate supply—meaning the supply of certain goods has increased, driving down prices.

As a result, Roubini observed, “core inflation has fallen” even though the “recent growth acceleration in the advanced economies would be expected to bring with it a pickup in inflation.” Meanwhile, the US Federal Reserve “has justified its decision to start normalizing rates, despite below-target core inflation, by arguing that the inflation-weakening supply-side shocks are temporary.” Roubini concludes that, “even though central banks aren’t willing to give up on their formal 2% inflation target, they are willing to prolong the timeline for achieving it.”

In my view, interpreting today’s low inflation as a symptom of temporary supply-side shocks will most likely prove to be a mistake. This diagnosis seems to misread the historical evidence from the period between the early 1970s and the late 1990s, and is thus based on a fundamentally flawed assumption about the primary driver of inflation in the global North since World War II.

Since the 1970s, economists have maintained a near-consensus belief that the Phillips curve has a substantial slope, meaning that prices react strongly to changes in demand. According to this view, relatively small increases in aggregate demand above levels consistent with full employment will have a substantial impact not just on inflation, but also on expectations of inflation. A period of rapidly accelerating inflation in the recent past will lead people to believe that inflation will increase in the future, too.

More than 20 years ago, I wrote a paper called “America’s Only Peacetime Inflation: The 1970s,” in which I challenged this narrative. I showed that, when the now-standard view about inflation was developed in the 1970s, increases in aggregate demand above levels consistent with full employment were actually few, short-lived, and small, and that past inflation jumps had been incorporated into future expectations not rapidly, but slowly over time.

In fact, it took three large adverse supply shocks for expectations to adjust. In addition to the Yom Kippur War of 1973 and the Iranian Revolution of 1979, productivity growth began to slow at the same time that unions still had substantial pricing power, and previously negotiated wage increases were already locked into many workers’ contracts.

Despite these shocks, central bankers, chiefly then-Fed Chair Arthur F. Burns, were hesitant to commit to achieving price stability. Instead, Burns, understandably worried that fighting inflation would bring a deep recession, decided to kick the can down the road. And as we now know, that set the stage for 1979, when Paul Volcker succeeded Burns as Fed Chair, hiked up the federal funds rate (a move now known as the “Volcker disinflation”), and brought on the Near-Great Recession of 1979-1982.

Strangely, this history of what actually happened was for some reason swallowed up by an alternative narrative that many still cling to today. According to this pseudo-historical retelling, Keynesian economists in the 1960s did not understand the natural rate of unemployment, so they persuaded central bankers and governments to run overly expansionary policies that pushed aggregate demand above levels consistent with full employment.

This was of course an affront to the gods of the market, who responded by meting out divine retribution in the form of high and persistent inflation. The Volcker disinflation was thus an act of penance. To expunge the original sin, millions of workers’ jobs and incomes had to be sacrificed.

The clear lesson from this telling is that economists and central bankers must never again be allowed to run overly expansionary policies. But that is obviously bad policy advice.

After all, it has been more than 20 years since economists Douglas Staiger, James H. Stock, and Mark W. Watson showed that the natural rate of unemployment is not a stable parameter that can be estimated precisely. And economists Olivier Blanchard, Eugenio Cerutti, and Lawrence H. Summers have toppled the belief that the Phillips curve has a substantial slope. In fact, to say that it had a substantial slope even in the 1970s requires one to avert one’s eyes from the supply shocks of that decade, and attribute to demand outcomes that are more plausibly attributed to supply.

Those who have used the prevailing economic fable about the 1970s to predict upward outbreaks of inflation in the 1990s, the 2000s, and now the 2010s have all been proven wrong. Why, then, does the narrative still have such a hold on us today?

The best—albeit inadequate and highly tentative—explanation that I have heard is that it fits with our cognitive biases, because it tells us what we want to hear. It seems to be in our nature to look for stories about sin and retribution, crime and punishment, error and comeuppance.

Finding out why we have this cognitive bias will no doubt launch many careers in psychology in the future. In the meantime, we should free ourselves from a heuristic prison of our own making.

J. Bradford DeLong is Professor of Economics at the University of California at Berkeley and a research associate at the National Bureau of Economic Research. 

© 2018 Project-Syndicate.

Anecdotal Evidence: Voya, Northwestern Mutual and Fake DOL Comments

Posted on January 4, 2018 by -

Welcome to 2018, which so far is on track to be just as strange as 2017. What will the infant year bring for the retirement income industry? What do the oracles say? Which of the millions of random news-dots seem connected?

A few days before Christmas, Voya Financial decided that it would get out of the business entirely. Voya was already closed its variable annuity business, whose risk exposure during the financial crisis was one reason why Netherlands-based ING divested its U.S. unit, which re-branded itself as Voya.

Voya, which is a major retirement plan provider, shifted its individual retirement emphasis to indexed annuities, which are less capital-intensive than variable annuities. As recently as in late October, at LIMRA’s annual conference, Voya’s Chad Tope told RIJ that Voya would soon enter the small but growing structured variable annuity market.

father time new year 2018Now Voya is out of annuities altogether. I haven’t talked to Voya’s folks since October, but I wonder if it’s a coincidence that its announcement came one month after reports that FIA sales for the third quarter of 2017 were down 12.6% from the previous quarter, and down 10.5% from the same period in 2016.

If, like me, you’re one of those people sitting in the cheap seats at the salty Margarita rim of the football stadium, wondering why more Boomers aren’t locking their seven years of frothy capital gains into imperturbable lifetime income, then you are also puzzled and concerned about weak annuity sales.

Not everyone sees it that way. At a tapas bar a few weeks ago, an advisor friend of mine lamented the lack of growth opportunities for his older clients. His comment made little sense to me. He sounded like a lottery winner wondering where his next meal would come from.

Many of his clients are sitting on huge capital gains. They have won the lottery. Their financial dreams have come true. Now it’s time to rake a big chunk of those gains off the table and lock them into meaningful future consumption.       

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Speaking of football: During last Saturday’s Cotton Bowl game, where Penn State managed not to squander a fourth-quarter lead for the third time this season, I saw a few of the new Northwestern Mutual ads. In one of them, a bearded young father decides to invest in a backyard swimming pool for his kids rather than meet with his financial advisor to talk about saving for retirement and long-term care needs.

The shift in marketing tone is a sign of the times—a sign that the Boomer train, draped as it were in funereal black bunting, has left the station. A new and younger train is arriving, and it’s full of people who are focused their quality of life today. Young people don’t respond to fear mongering about the distant future. Northwestern Mutual’s new ads harmonize with the growing emphasis on “financial wellness” in the workplace.

HR departments and retirement plan providers recognize that the new plurality in the workforce is more concerned about student debt, affordable health insurance and a first mortgage than about retirement. Young people today aren’t even sure the planet will be here by the time they reach age 65.  

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Conspirators with a grotesque sense of irony tainted the public comment board at the Department of Labor with counterfeit negative comments about the DOL fiduciary rule, according to a Wall Street Journal story that was picked up by NAPANet and PlanAdviser.

Someone or several people appear to have decided to lie in a debate about truthfulness, by posting comments under the names of real people other than themselves. The purpose was presumably to compensate for a shortage of genuine public opposition to the Rule.

On December 28, PlanAdviser reported, citing The Wall Street Journal story, that the fiduciary rulemaking was the “direct target of trolls” and that “40% of the thousands of individuals surveyed by its reporters said they did not write the comments attributed to them on the Labor Department’s public website.”

But Nevin Adams of the American Retirement Association, noting that the Journal didn’t get many responses to its survey of authors of thousands of public responses on the cite, has suggested that there may only have been a handful of fake comments on the DOL site. The statement, “40% of thousands” were fake, just isn’t true, he wrote on LinkedIn. The Journal may have decided that the result of a small sample was representative of thousands of comments. It’s just another reminder that we live in an era of “fake news.”  

Knowingly posting false comments to a federal website is a crime. If the Journal report itself is factual, and there was a significant dirty-tricks effort to fog up the public discourse around the Rule, then I hope that the trolls, and the people who directed and paid the trolls, are exposed, prosecuted and never pardoned.   

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