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U.S. Housing Value & Rental Payments, Total and by metro area

Posted on January 4, 2018 by Editorial Staff -

Source: Zillow.com December 28, 2017

Why Low Inflation Is No Surprise

Posted on January 4, 2018 by J. Brad DeLong -

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.

Anecdotal Evidence: Voya, Northwestern Mutual and Fake DOL Comments

Posted on January 4, 2018 by Kerry Pechter -

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.

Now 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.

* * *

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.

* * *

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.

“Fiduciary” share of advised retail assets up 68% since 2005: Cerulli

Posted on January 4, 2018 by Editorial Staff -

More than four-tenths (42%) of advised retail assets are now in the hands of advisors who are subject to a fiduciary standard, according to the December 2017 issue of The Cerulli Edge–U.S. Monthly Product Trends Edition. The comparable figure in 2005 was 25%.

This growth of fee-based managed accounts and the registered investment advisor (RIA) channel, which occurred in the wake of the Obama DOL fiduciary rule, are driving the trend, a Cerulli press release said. “Fee-based relationships better align with the goals of firms, advisors, and investors by tying revenue growth to client portfolio performance,” Cerulli commented.

Its latest report covers retail investor trends and highlights recent mutual fund and ETF flows. According to the report:

November’s mutual fund net flows reflected the ongoing shift from active funds to passive funds, with net flows of $12.4 billion into index and exchange-traded funds and negative flows of $6.5 billion out of actively-managed mutual funds.
ETF assets surged past $3.3 trillion, bolstered by net flows of $39.3 billion (organic growth of 1.2%). Capital appreciation powered the surge, especially in the U.S. where the S&P 500 Index returned 3.0% for November.

Cerulli also commented the criteria that advisory firms serving wealthy clients use to evaluate and select mutual fund managers. “Across all HNW practices, 63% rank philosophy and process as the most important factors,” the report said. Least important were “access to portfolio managers” and amount of assets under management.

“Multi-family offices (MFOs) place the greatest emphasis on philosophy and process (84%), while RIAs view fees and expenses (65%) as most important when conducting due diligence on asset managers,” Cerulli said.

Is Northwestern Mutual’s new ad campaign a bellwether?

Posted on January 4, 2018 by Editorial Staff -

A new brand campaign from Northwestern Mutual, whose TV ads viewers of college football’s bowl games could see first-hand on their video screens last weekend, downplays retirement planning and encourages a members of a younger audience to enjoy their money today.

The campaign’s theme is “Spend Your Life Living.” In one ad, a bearded young father suddenly realizes that his kids won’t be young forever and decides to dig a backyard swimming pool for them to enjoy the present. According to ispot.tv, the ad had a “78% positive” sentiment rating.

“Many people are stressed about their finances and saving for their future retirements, making it challenging to make the most of life’s moments now without feeling guilty,” Northwestern Mutual said in a press release. The mutual giant intends the campaign “to reframe people’s idea of planning for their financial futures, and help them feel empowered to make the most of enjoying life every single day.”

The new theme, coincidentally or not, fits perfectly with the pivot from the “retirement readiness” to “financial wellness” within corporate human resource circles. The shift is occurring as the Boomer share of the employee population gradually shrinks and the priorities of younger workers come to the fore.

“People are in a balancing act of how they can enjoy today while preparing for tomorrow, and this results in massive anxiety,” said Aditi Gokhale, chief marketing officer, Northwestern Mutual, in statement that echoes the latest financial wellness literature.

Financial wellness programs are now seen as speaking more generally to different age groups and even different cultural groups than retirement readiness programs do. [See today’s cover story on financial wellness in RIJ.]

“Through focus group research, Northwestern Mutual found that the tension between living for now and saving for later was universal for people regardless of demographics,” the release said.

Advertising agency GSD&M (Austin, Tx.) worked with Northwestern Mutual on developing the overall brand campaign and created four TV spots for “Spend Your Life Living” that will air throughout 2018. The ad spots — called “Backyard Bliss,” “This Call’s for You,” “Fish Out of Water” and “Ocean, Whoa” — tap into each of the consumer insights.

Spots began to launch during the Cotton Bowl on December 29 and on ABC Network during Dick Clark’s New Year’s Rockin’ Eve and will be featured across numerous platforms including print, digital, and social.

As the presenting sponsor of the Rose Bowl Game for the fourth consecutive year, Northwestern Mutual also brought the new campaign to life with a large-scale event on January 1. Northwestern Mutual took over part of the tailgate outside of the Rose Bowl stadium to recreate a massive end zone, encouraging fans to join and share their best touchdown dance on social media with #SpendLifeLiving. The Northwestern Mutual “Touchdown Dance” will also be recreated at the College Football Playoff National Championship game on January 8.

Voya’s strength ratings are under review

Posted on January 4, 2018 by Editorial Staff -

A.M. Best is reviewing the Financial Strength Rating (FSR) of A (Excellent) and the Long-Term Issuer Credit Ratings (Long-Term ICR) of “a+” of the key life insurance entities of Voya Financial, Inc., subsequent to Voya’s decision to leave the annuity business.

Concurrently, A.M. Best has placed under review with developing implications Voya’s Long-Term ICR of “bbb+” as well as its existing Long-Term Issue Credit Ratings (Long-Term IR). (Please see below for a detailed listing of the companies and ratings.)

In late December, Voya announced that it would sell its closed block variable annuity (CBVA) and individual fixed indexed annuity (FIA) segments to a consortium of investors led by Apollo Global Management, LLC. Voya will divest Voya Insurance and Annuity Company (VIAC), the insurance subsidiary that has primarily issued the variable, fixed and fixed indexed annuities to Venerable HoldCo, Inc., a newly formed investment vehicle owned by a consortium of investors. VIAC’s variable annuity account value represents approximately $35 billion.

In addition, Voya will sell via reinsurance to Athene Holding Ltd. approximately $19 billion of fixed and indexed annuity policies. The transaction is expected to result in approximately $1.1 billion of value, which includes a $400 million ceding commission paid to Athene Holding Ltd.

These transactions are expected to reduce Voya’s earnings volatility. The CBVA segment has been susceptible to earnings volatility and substantial statutory reserve charges due to revisions in policyholder behavior assumptions. While the transaction reduces Voya’s shareholder’s equity by about $2.3 billion, it also lessens their exposure to policyholder behavior and market volatility. This transaction also changes the business profile of the company, given that 80% of its earnings would be generated from its retirement, investment management and employee benefits businesses.

Voya also will be conducting a strategic review of its individual life business during the first half of 2018. A.M. Best anticipates that Voya’s ratings likely will be removed from under review following the close of the transaction, which is expected to occur in second-quarter or third-quarter 2018. The under review with developing implications also is in response to the execution risk associated with the transactions.

The FSR of A (Excellent) and Long-Term ICRs of “a+” have been placed under review with developing implications for the following life insurance subsidiaries of Voya Financial, Inc.:

Voya Insurance and Annuity Company, Voya Retirement Insurance and Annuity Company, ReliaStar Life Insurance Company, ReliaStar Life Insurance Company of New York, and Security Life of Denver Insurance Company

The FSR of A- (Excellent) and the Long-Term ICR of “a-” have been placed under review with developing implications for Midwestern United Life Insurance Company. The following Long-Term IRs have been placed under review with developing implications: Voya Financial, Inc.—

— “bbb+” on $1.0 billion 2.90% senior unsecured notes, due 2018
— “bbb+” on $850 million 5.50% senior unsecured notes, due 2022
— “bbb+” on $400 million 3.125% senior unsecured notes, due 2024
— “bbb+” on $500 million 3.65% senior unsecured notes, due 2026
— “bbb+” on $400 million 5.70% senior unsecured notes, due 2043
— “bbb+” on $300 million 4.80% senior unsecured notes, due 2046
— “bbb-” on $750 million 5.65% fixed-to-floating junior subordinated notes, due 2053

Honorable Mention

Posted on January 4, 2018 by Editorial Staff -

The Segal Group acquires Touchstone Consulting

David Blumenstein, President and CEO of The Segal Group, announced that effective January 1, 2018 the firm has acquired Touchstone Consulting Group, an employee benefits consulting firm based in Worcester, MA.

Touchstone Consulting provides retirement, health and welfare and related employee benefit consulting services. They have a deep experience working with global corporations and Fortune 500 companies. They are now part of Sibson Consulting, the division of The Segal Group that provides human resources and benefits consulting to corporations, higher education institutions and nonprofit organizations.

Former clients of Touchstone will now receive Sibson’s market-leading educational materials on compliance and benefits, as well as guidance to help them navigate the maze of federal, laws and regulations related to benefit plans.

Five employees from Touchstone have joined Sibson Consulting. They will continue to be based in Worcester.

The Segal Group (www.segalgroup.net) is a private, employee-owned consulting firm headquartered in New York and with more than 1,000 employees throughout the U.S. and Canada. Members of The Segal Group include Segal Consulting, Sibson Consulting, Segal Select Insurance Services, Inc., and Segal Marco Advisors.

Envestnet acquires FolioDynamix

Envestnet, a leading provider of intelligent systems for wealth management and financial wellness, today announced that it has completed the acquisition of FolioDynamix from Actua Corp. The acquisition was first announced on September 25, 2017.

FolioDynamix provides financial institutions and registered investment advisors with an end-to-end technology solution which includes a suite of advisory tools that assist advisors in creating model portfolios and delivering overlay management services. The acquisition will add complementary trading tools as well as commission and brokerage business support to Envestnet’s existing suite of offerings.

In connection with the Acquisition, Envestnet paid $195 million in cash for all the outstanding shares of FolioDynamix, subject to certain closing and post-closing adjustments. Envestnet funded the Acquisition price with borrowings under its revolving credit facility.

Mrozek to lead mid-sized plan sales at Lincoln

Lincoln Financial Group announced the appointment of Joe Mrozek as national sales manager for the Intermediary Retirement Plan Services division of Lincoln Financial Distributors, Inc. (LFD), the company’s wholesaling distribution organization. He reports to John Kennedy, senior vice president and head of Retirement Solutions Distribution.

In his position, Mrozek will focus on the small market 401(k) segment, and is responsible for leading a wholesaling team focused on delivering retirement solutions that will drive positive outcomes for both employers and employees in plans with assets of less than $25 million.

He joins Lincoln from Bank of America Merrill Lynch, where he spent the last 22 years of his career, and most recently as managing director/national sales manager for the Retirement and Personal Wealth Solutions division. Mrozek previously held positions at Coopers & Lybrand, Morgan Stanley, and Sedgwick Noble Lowndes.

Mrozek received his Bachelor of Arts degree in Economics from Montclair State University. He resides in Scotch Plains, NJ with his wife and children.

AdvisorEngine buys Junxure

AdvisorEngine, the innovative fintech company that is reimagining how technology can serve financial advisors, has acquired CRM Software, Inc., better known as Junxure – provider of the industry’s most awarded CRM (“client relationship management”) software with a 98% client satisfaction rate1 across 12,000 users managing over $600 billion in assets. The combined company will pair digital solutions with consulting services to help financial advisors use technology as a competitive advantage.

As part of the acquisition, WisdomTree Investments, Inc.—the global ETP sponsor driven by research and technology, and AdvisorEngine’s largest shareholder—has committed to lend up to $30 million of working capital to AdvisorEngine, including providing an initial funding amount of $22 million today. The majority of the proceeds will be used to fund the acquisition, with the remainder to be used for future technology development and other growth initiatives.

Value of U.S. homes up 1.9 trillion in 2017: Zillow

The total value of all homes in the United States is now $31.8 trillion after gaining about $1.9 trillion in 2017, according to Zillow.com.

The cumulative value of the U.S. housing market grew at its fastest annual pace – 6.5% – in four years. The value of all U.S. homes rose 8% annually in the early stages of the housing recovery in 2013. The housing market has gained $9 trillion since the lowest levels of the recession.

The Los Angeles and New York markets each account for more than 8% of the value of all U.S. housing, and are worth $2.7 trillion and $2.6 trillion, respectively. San Francisco is the only other housing market worth more than $1 trillion.

Among the 35 largest U.S. markets, Columbus grew the most in 2017, gaining 15.1%. San Jose, Dallas, Seattle, Tampa, Las Vegas and Charlotte, N.C. also grew by 10% or more over the past year.

Renters spent a record $485.6 billion in 2017, an increase of $4.9 billion from 2016. Renters in New York and Los Angeles spent the most on rent over the past year. These markets are also home to the largest number of renter households.

San Francisco rents are so high that renters collectively paid $616 million more in rent than Chicago renters did, despite there being 467,000 fewer renters in San Francisco than in Chicago. Las Vegas, Minneapolis and Charlotte, N.C. had the largest gains in the total amount of rent paid, with each increasing by more than 7% since 2016.

Jellyvision Knows Financial Wellness

Posted on January 3, 2018 by Kerry Pechter -

Can a dash of oregano help solve a plan participant’s personal financial problems? It can’t, at least not directly. But the mention of oregano, the Millennials at The Jellyvision Lab, Inc., have found, can spice up discussions of “snooze-inducing life decisions” about healthcare and retirement enough to enhance participants’ financial wellness.

As Jellyvision’s website puts it, the firm’s recipe is “behavioral science, purposeful humor, mighty tech, and oregano” plus the voice of an interactive digital assistant named “ALEX” who cheerfully guides participants through the benefits maze.

Founded by digital game entrepreneur Harry Gottlieb, Jellyvision is now the “go-to” vendor for web-based benefits education at dozens of Fortune 500 companies, according to Andrew Way of Corporate Insight. Supporting financial wellness programs is a growing part of Jellyvision’s business.

“We operate at the confluence where employee pain results in employer dollars,” said Helen Calvin (right), Jellyvision’s senior vice president of Customer Insights, in an interview with RIJ this week. “We ask, ‘Where is the pain that’s costing employers money, and how do we guilelessly and empirically help employees solve the problem?’”

Mantra du jour

“Financial wellness” is a catchall phrase that’s been gradually crowding out “retirement readiness” as the mantra du jour of corporate human resource departments. The phrase refers to educational programs that help employees with whatever ails them financially, from personal debt to health care costs to retirement savings shortfalls.

From an HR perspective, Boomers are a shrinking segment of the workforce and their financial problems can be seen as too-late-to-fix. So many HR teams have begun directing their attention to the needs of mid-career and Millennial employees, for whom emergency expenses, first mortgages and college funds may be more urgent than 401(k) accounts.

Financial wellness programs cost money, however. So the challenge for HR professionals has been to convince senior management that the programs pay for themselves. In theory, the payoff will come in at least two ways: higher productivity from employees who are less distracted at work by anxiety over personal finances and, in the long run, greater retirement readiness, so that older employees can afford to retire and won’t linger at the workplace, hanging on to high-paying positions and blocking the advancement of younger people.

It’s ironic: Private-sector pensions were first created to enforce mandatory retirements. When life expectancies were shorter, the replacement of high-wage older workers with lower-paid younger workers would finance the pensions. In recent decades, companies shifted longevity risk to employees by switching to defined contribution retirement plans, but now employees can’t afford to retire. As a result, the old “workforce management” issue has boomeranged back.

A 2017 white paper from Prudential, citing PricewaterhouseCoopers data, said that a one-year average delay in retirement could raise workforce costs by 1.2%, a two-year delay by 2.2% and a three-year delay by 3.0%. The cost of paid vacation leave in particular would go up by 3.6%.

Similarly, a November 2016 article in HR Professionals Magazine, quoting a 2012 AARP survey, said, “70% of Baby Boomers believe they will be forced to delay retirement… The average annual health and disability insurance for an employee in their 20s is $3,100. That cost grows to $11,300 for employees over the age of 60. The salary differential between the two age groups is slightly more than $12,000 per year [based on US Bureau of Labor Statistics data].”

The jury is out, however, on whether financial wellness programs will help retirement readiness or hurt it. As employees relieve short-term financial pressures by deferring more of their pay to emergency funds and health care savings accounts, two opposite effects are possible: A drop in leakage and hardship withdrawals from 401(k) accounts, leading to higher retirement readiness, or a drop in 401(k) contributions, leading to lower retirement readiness.

“The challenge for employers is whether they can provide flexibility and choice that better meet short term financial needs, without reducing financial security in the long-term,” said a Willis Towers Watson study presented at the Pension Research Council’s annual meeting in Philadelphia last spring.

Six marriage proposals

Where challenges exist, so do opportunities. For retirement plan providers, financial wellness offerings are now a must-have. At first, providers saw the programs as an advantage in competing for plan sponsor business; now they see it as a competitive necessity. Firms are either developing financial wellness capabilities internally or sub-contracting to specialists like Jellyvision—for whom the trend is a major source of growth.

In the past, attempts to teach employees to use money more wisely have tended to disappoint. “It seems undeniable that more financial education is needed… Yet it is also hard to design and implement financial education programs that really work,” said the Willis Towers Watson study. “One of the lessons of the last 20 years is that the engaged consumer model has not worked in employee benefits.”

Engagement is Jellyvision’s specialty, and that’s one reason for its success in this niche. “Employers starting coming to us three or four years ago and said this is the greatest plague we face,” Calvin told RIJ. “They asked, what are the quickest ways we can put our employees in a better financial position?” Pay increases might seem like the obvious answer, but companies are trying to do more with less.

“Certainly you will have employees who, despite their best efforts, are not getting paid what they need to sustain a normal life,” Calvin observed. “But we see people with significant incomes in poor financial positions. We see a lot of people not spending wisely. If you put more money in a leaky funnel, it won’t necessarily improve the situation.”

Building on its gaming experience, Jellyvision claims to be able to “break through the screen” and push the buttons that stimulate engagement. Its benefits business began to take off in 2009 when it started ALEX, “proprietary software that mimics the kind of conversation you’d have with a true expert—one with a sense of humor,” Calvin said.

“Based on your answers, ALEX caters the rest of experience. It helps you do the math. It can pull in data feeds and APIs. It’s not a chatbot. The software is called TalkShow. Think of it like a complex flowchart, operating off data that comes in through feeds and the Q-and-A, while mimicking conversation.

“We have an average engagement of between seven and nine minutes, which is high,” she added. “ALEX saves employers money but is also seen as a value-add by the employees. It gets extremely high satisfaction scores from employees and, so far, six marriage proposals. One of ALEX’s voices is a man’s, and several women have asked us if he’s single.”

‘Public-Option’ Workplace IRAs Proceed in Oregon, California

Posted on December 21, 2017 by Kerry Pechter -

Oregon and California are moving ahead with their state-sponsored, workplace auto-enrolled Roth IRA programs despite efforts by the financial industry, the Republican Congress and President Trump over the past year to frustrate their implementation.

In interviews, the executive directors of the two programs told RIJ that neither the Trump administration’s cancellation of the federal auto-IRA project, known as MyRA, or the revocation of the Obama Department of Labor’s “safe harbor” for state plans from federal labor law will stop them.

“We’ve moved forward and we’re having a good experience,” Lisa Massena (below left) of OregonSaves told RIJ. “We completed a couple of pilots this year, to make sure the program would work. Now we’re in the process of rolling out ‘wave 1’ to larger employers in the state.” In the future, Oregon expects to offer a traditional IRA in addition to its Roth option.

“[The cancellation of MyRA] was a disappointment for sure,” said Katie Selenski of California Secure Choice. “It means we won’t be able to offer MyRA’s low-risk safe asset investment options to our participants. But it’s not slowing us down.” The state expects the program will open with a soft launch in summer or autumn of 2018 and officially open for statewide enrollment in early-2019.

OregonSaves, which has completed two pilot programs and will start formally in just 10 days, is the farthest along of about a dozen proposed state-sponsored plans. The plans are intended to address the fact that, at any given time, tens of millions of American workers, especially minority workers at small companies, have no way to save for retirement at work.

The MyRA plan was the Obama Treasury Department’s answer to that problem, but certain states and large cities moved ahead with their own programs. Those programs differed from state to state. California and Oregon sponsored their own IRA programs. Seattle has just announced the start of a municipal IRA program.

Other states have positioned themselves as facilitators of private-sector solutions to the problem. Washington has set up an exchange where small businesses and low-cost 401(k) plan providers can find each other. Recent legislation in Vermont allows small business owners to join “multi-employer plans” run by major 401(k) providers.

The state-sponsored plans have provoked criticism from conservative legislators and private industry. Financial advisors (represented by the National Association of Insurance and Financial Advisors) who sell 401(k) plans to small companies and asset managers who distribute mutual funds through those advisors to small plan participants objected to the potential competition from a public IRA option.

Some conservative legislators in Congress warned, despite their traditional states’ rights ideology, that a proliferation of individual state-sponsored retirement plans would Balkanize the system and cause headaches for multi-state employers. Others warned that participants in state plans wouldn’t have the protections that federal labor law provides.

But the state plans were getting support from the Obama administration. The Treasury’s MyRA program allowed state plans to use the MyRA program’s investment options until they fully developed their own investment menus. In 2016, DOL deputy secretary Phyllis Borzi issued a legal opinion emphasizing that the DOL wouldn’t try to regulate the state plans.

Those were the tailwinds that President Trump tried to reverse by killing the MyRA program and that Congress tried to frustrate by revoking the Borzi opinion. But lawyers for the Oregon and California plans said they would proceed anyway.

“Our board and the state treasurer’s office decided, on advise of legal counsel, that they were in a good position to move forward,” Massena said. “They knew that without some action on our part that a lot of workers would not get coverage. Some of the states may have stepped back because of the administration’s action. But the original states are all making good progress. We’re seeing some new legislation from the cities. Seattle will probably start working on their plan in earnest in the first quarter of 2018.”

“The day after President Trump signed the repeal [of the DOL safe harbor ruling], we had a press conference and announced that we were proceeding as planned,” Selenski (below right) said. “It would have been nice to have the new safe harbor. It added clarity. But the effort to get a new safe harbor was a belt-and-suspenders move. Secure Choice already qualifies for the existing 1975 safe harbor. We received a legal opinion to that effect from our counsel, K&L Gates, and we’ve been saying ever since that we are on strong legal footing.”

Several elements aligned to make Oregon and California likely initiators of the state-sponsored Roth IRA (which involves after-tax contributions, tax-free withdrawals of principal and tax-free withdrawals and gains after five years or in retirement).

Both states have Democratic majorities in both chambers of their legislatures and both have Democratic governors: Jerry Brown in the Golden State and Kate Brown in Oregon. While three states with workplace savings projects—Illinois, Vermont and Maryland—have Republican governors, there are Democratic majorities in both houses of the legislature.

In California, Latinos represent a singularly large percentage of the state population and, importantly, a large percentage of the workforce that lacks a retirement plan at work. Latinos are also a force in the legislature. Kevin de Leon, the president pro tem of the state Senate, championed Secure Choice. In public, he often said that his own aunt’s inability to save during her career as a domestic worker inspired his support for the program.

Secure Choice also got organized support in California from UnidosUS, the large Latino advocacy group (formerly called La Raza) and from Service Employees International Union (SEIU), whose largest chapter is in California and which doesn’t provide a retirement plan for its members.

In Oregon, Massena pointed out, about one million of the state’s 1.8 million workers lack a workplace plan. In California, 7.5 million workers are without workplace plans. Of those Californians, two-thirds are people of color and, of those, half are Latino, according to the plan’s official website.

In both states, companies that do not offer retirement plans must start their own 401(k) or adopt the state-sponsored plan. (Lack of an employer mandate crippled the MyRA plan.) In Republican circles, mandates (like the Obamacare mandate) are always unpopular. In the debate over the state-sponsored plans, there was much speculation and disagreement over whether the mandate would help the private 401(k) industry by sparking employers to sponsor a 401(k) plan for the first time or whether employers without plans would be tempted to opt for the state Roth IRA, which entails none of the administrative chores or fiduciary responsibilities of a 401(k) plan.

(The draft regulations in California, as yet unapproved by the Secure Choice board, establish the default setting as Roth and participants will have the option of choosing a traditional IRA. Regulations will come the Board for a vote in January.)

Though more complex to set up and maintain, a 401(k) plan is more attractive than a Roth IRA in several ways. It allows a huge tax deferral for the business owner, it has higher contribution limits for participants, it allows an employer matching contribution, and it can allow loans to participants. The question remains open: Will the mandated state-sponsored IRAs stimulate business for the private-sector or cannibalize it?

“I think OregonSaves has prompted a number of employers to start 401(k) plans,” Massena added. “We’ve provided a catalyst whereby an employer must take action. If you’re someone who sells 401(k) plans, we’ve given you an opportunity to approach employers about starting a plan.

“It would be one thing if we were seeing employers dropping plans. But we’re not hearing that at all. What we hear is that small businesses are tough to serve at a good price point. We hear small business owners say, ‘Every year I look at the cost of offering a 401(k) plan and every year I find I can’t afford it.’”

A Simple Idea for Increasing Annuity Sales

Posted on December 21, 2017 by Kerry Pechter -

If you’re a financial advisor struggling to describe the value of a lifetime income product to retirees, you might first try explaining how hard it is for anyone to arrive at an optimal spending rate in retirement so that they don’t run out of money before they die or die before enjoying enough of their money.

Then you can say that an annuity might solve that problem.

That’s one takeaway from a scholarly but practical new article from a notable group of retirement researchers. Published this month by the National Bureau of Economic Research, the work was underwritten by the TIIA Institute, perhaps for application by TIAA’s own advisors. Anyone selling annuities could take a lesson from it.

One of the authors of the paper, Jeffrey Brown of the University of Illinois, has long maintained that the reason so few Americans purchase income annuities is not because they don’t like them, but because they incorrectly “frame” annuities as investments (which they are not; they’re insurance).

Other prominent researchers share that view. The “tiny market share of individual annuities should not be viewed as an indicator of underlying preferences but rather as a consequence of institutional factors about the availability and framing of annuity options,” wrote 2016 Nobel Prize-winning economist Richard Thaler, Shlomo Benartzi and Alessandro Previtero in 2011.

Brown’s new paper, “Behavioral Impediments to Valuing Annuities: Evidence on the Effects of Complexity and Choice Bracketing” (co-authored by Olivia Mitchell of the Wharton School, Erzo Luttmer of Dartmouth, and two professors from the University of Southern California’s Center for Economic and Social Research, Arye Kapteyn and Anya Samek) introduces a solution to this “annuity puzzle.”

The authors set up a crafty experiment to find out how well people understand the value of an guaranteed income.

“We first asked respondents to advise a hypothetical person how much he should be willing to pay to buy additional annuity stream (the ‘buy’ condition), versus how much money he should require to reduce his annuity holdings (the ‘sell’ condition),” Olivia Mitchell, who is director of the Pension Research Council, told RIJ.

“Generally speaking, respondents advised people to pay very little to purchase an additional annuity, but to demand a large sum of money to give up a portion of annuity income.”

The authors interpreted this discrepancy as a sign that those individuals underestimated the ability of an annuity to take some of the uncertainty out of spending rates in retirement. Then they varied the experiment by telling some of the volunteers the following anecdote:

“Mrs. Smith is a single, 65-year old woman with no children, and she is as healthy as the typical 65-year old woman. She just retired and receives her monthly Social Security check. She is talking with her financial adviser on how to spend her substantial savings in retirement. Her advisor explains that she could decide to spend down her savings relatively quickly. In this case, she will be more likely to be able to enjoy her money during her lifetime. But she also runs a risk of running out of money while alive and having to cut back on her spending as a result. Her advisor explains that she could also decide to spend down her savings relatively slowly. In this case, she will be less likely to run out of money. But now she runs a risk of not getting to enjoy all her money during her lifetime.”

When the researchers introduced this anecdote into the mix, the volunteers’ spread between the price of buying or selling part of the Social Security benefit shrank on average. The researchers took it as a sign that the volunteers’ appreciation of the value of an annuity was more “rational” and that, by implication, they were more likely to consider buying an annuity.

“The consequences message narrowed the buy-sell spread, in particular by raising the buy price,” Mitchell said. “In other words, annuitization decisions can be improved by getting people to think about how annuities help people avoid running out of wealth in old age.”

An individual’s intelligence also affects their ability to understand the value of an annuity, but financial advisors can’t change that, the authors observed. On the other hand, a little homily may make a big difference.

Rothification Wouldn’t Have Hurt Lower-Income Taxpayers

Posted on December 21, 2017 by Meir Statman -

Tax considerations underlay politicians’ drive to “Rothify” defined-contribution (DC) retirement saving accounts, switching them away from traditional defined-contribution (DC) retirement saving accounts. Rothification would have brought higher tax revenues today and lower tax revenues decades from now when today’s members of Congress are long into retirement or gone.

Money contributed to traditional accounts is pre-tax money, but subject to tax when withdrawn, whereas money contributed to Roth accounts is after-tax money, not subject to tax when withdrawn.

You can see the difference in a simple example: Consider Jane, a 25-year-old contributing $1,000 pre-tax to a traditional account. Her current income places her in the 20% tax bracket. This implies that Jane pays $800 out of her pocket, taking into account the $200 “tax rebate” she receives, yet has the full $1,000 in her account.

That $1,000 compounds to approximately $13,765 at an annual 6% return during the 45 years until she retires at 70. Imagine that Jane’s tax bracket in retirement is also 20%. The after-tax amount Jane receives when she withdraws the money is 80% of $13,765, approximately $11,012.

Now consider John, another 25-year-old under the same circumstances, contributing $800 after-tax to a Roth account. The amount compounds to approximately $11,012 at age 70 and is tax-free when withdrawn.

In this case, Jane and John do equally well, contributing the same after-tax amount at age 25 and collecting the same after-tax amount at age 70.

The usual argument in favor of traditional accounts is that marginal tax rates are likely lower at age 70, in retirement, than at age 25, when employed. Yet this is not always true. Low-skill employees might be at a low or zero tax bracket at age 25 and remain so in retirement.

High-skill employees might be at low tax brackets at age 25, at the beginning of their careers, but at higher tax brackets at age 70, in retirement, when Required Minimum Distribution (RMD) rules compel them to begin withdrawals from possibly fat traditional accounts, and pay taxes on these withdrawals.

Why, then, did so many in the financial services industry object so strenuously to Rothification? A cynic might note that members of the industry who charge fees on $1,000 in traditional accounts when employees are 25, increasing to about $13,765 at age 70, collect more fees than when they charge fees on only $800 in a Roth account when employees are 25, increasing to about $11,012 at age 70.

Rothification would have disadvantaged well-off employees at high tax brackets, such as professionals at the peaks of their careers, who might be at lower tax brackets in retirement. Yet, such employees have both the financial means and self-control necessary for adequate retirement savings.

I do not worry much about their prospects for adequate retirement income. I worry much more about poor employees and employees at the beginning of their careers. Rothification would not have affected them much.

Moreover, there is evidence that employees are pretty oblivious to tax considerations when they save, whether in traditional accounts or Roth accounts. If so, they might not have reduced much the amounts saved from $1,000 to $800 when Rothified.

Instead they might have contributed $900 or perhaps even $1,000 to a Roth account, increasing their overall retirement savings and prospects for adequate retirement income.

Objection to Rothification was one indicator that current DC plans were designed by well-off people for fellow well-off people. Consider the common feature of employer “matching,” where employers contribute a percentage of employee income, such as 3%, but only as a match to an equal contribution by an employee.

Matching works well for well-off employees who have the financial means and self-control necessary to contribute even more than the 3% necessary for a match. But it does not work well for poor employees who lack the financial means and self-control to do so.

What is more, lack of financial means hampers self-control, as the poor are overwhelmed by many financial demands, from children’s care to utility bills and car repairs. Moreover, many low-income employees lacking the means necessary for a contribution qualifying them for a company match, borrow that amount, possible at high interest rates, nullifying much of the benefit of a company match.

A cynic might say that companies introduced the matching feature to do what it actually does — shortchange poor employees by diminishing company contributions, under the guise of motivating such employees to save.

Consider an analogy to matching in coupons issued by companies, such as Procter & Gamble for Tide detergent. A 50-cent coupon is not likely to entice a person with ample income and scarce time to clip the coupon and carry it to the supermarket.

But it is likely to entice a person with scarce income and ample time. This way, P&G engages in “price discrimination,” selling the same detergent at a higher price to well-off people and a lower price to poor people who would buy a cheaper brand if not for the coupon. P&G would not engage in the coupon practice if all people redeemed them.

Companies offering matching engage in an analogous practice, where well-off people “clip” the employer-match “coupons,” whereas the poor do not. Some employers, perhaps many, would reduce their match if all employees were to clip and redeem employer-match coupons.

Some companies, especially not-for-profit ones such as universities, offer “matchless” contributions. I wish all companies adopted this practice.

While on the topic of employer contributions, it is important to note that the employer switch from defined benefit (DB) pension plans to DC retirement saving plans had two effects, one regularly highlighted and one generally overlooked.

The highlighted effect is the shift of risk from employer to employee, such that, for example, employees now bear the risk of stock market crashes. The second effect is a vast reduction in employer contributions to employee retirement savings.

The current average employer contribution in DC plans is approximately 4% of salaries. But it was double that percentage, or more, in DB plans. One marker of the decline in the power of employees relative to employers is the current practice of beating up employees for saving too little, while giving a free pass to employers who contribute little.

Meir Statman is the Glenn Klimek professor of finance at Santa Clara University’s Leavey School of Business and the author of, “Finance for Normal People: How Investors and Markets Behave.” The article is reprinted here with permission from the author.

Even RIAs are feeling pressure to charge less and automate

Posted on December 21, 2017 by Editorial Staff -

Registered investment advisors (RIAs)—an advisor channel that captured a big share of the high net worth client market after the financial crisis—now feel forced to take measures to reverse declining revenue and client growth, according to the 2017 Fidelity RIA Benchmarking Study.

The study showed that RIA revenue yield has dropped 3 basis points (bps), the revenue growth rate has fallen to 7% and the client growth rate to 5%, the lowest level in five years. Fidelity Clearing & Custody Solutions, a division of Fidelity Investments, sponsored the study, which identified three new trends:

Pricing: 64% of RIAs are offering fee discounts, and RIAs have begun to unbundle their fee structures.
Productivity: 33% of RIAs plan to implement a digital solution in the next 18 months.
Segmentation: the number of RIAs naming client segmentation as a top focus area has risen sharply.

“Discounting could signal that RIAs are bridging to the practice of unbundled fee structures, which may help to attract fee-sensitive clients, align services with value and protect against the commoditization of investment management,” said David Canter, head of the RIA segment for Fidelity Clearing & Custody Solutions, in a press release.

RIAs appear to realize “that alternative pricing structures may be critical to attracting new clients,” the release said. About 40% of investors would prefer a financial advisor with lower fees, according to Fidelity.

While stated core basis-points (bps) fees across all firm sizes have remained stable, the study showed that 64% of RIAs are discounting their fees. Mid-size and larger firms are more likely to be discounters, with 79% of firms with $500-$999 million in assets offering discounts compared to 57% of firms with $50M-$99 million in assets.

The average discount across all firm sizes is 21 bps, but the discount jumps up to 28 bps for firms with more than $1 billion in assets. Discounters set fees 10-15 bps higher than other firms for clients $2 million and above, but then appear to negotiate lower fees across the board. Actual fees could be 10-20 bps below reported fees.

Formal unbundling is occurring as RIAs charge extra for certain services. Retirement plan services are included as a bundled service by 15% fewer firms, trust services by 14% fewer, and investment management by 10% fewer.

RIA productivity is at or near its highest level in five years, the study showed. Assets under management per client remain at $1.1 million, and assets per advisor and clients per advisor are up 11% each. But RIAs are looking toward digital solutions and client segmentation to raise productivity higher. The study found that:

41% of RIAs are considering or already using a digital solution.
33% are looking to implement a digital solution within the next 18 months.
RIAs who use digital solution work with nearly three times as many clients as non-users (566 vs. 202 on average), have 2.5 times the assets under management ($533M vs. $209M) and three times the revenue ($4.2M vs. $1.4M).

Technology remains a priority for RIAs. Almost half (49%) say that investing in new or existing technology is a strategic priority for their firm. The number of RIAs naming client segmentation as one of their five focus areas, has risen by seven percent. Client segmentation is associated with higher productivity.

Britain wants to bump up retirement savings rates

Posted on December 21, 2017 by Editorial Staff -

The UK government wants to drop the lower age limit for auto-enrollment in workplace retirement to age 18 from age 22 and to scrap the lower earnings limit so that every penny-earned is pensionable. Today, auto-enrolled workers’ contributions are based only on pay in excess of the first £5,876 ($7,865), according to a report in IPE.com

The proposals are the outcome of the Department for Work and Pension’s (DWP) review of automatic enrollment, which the government said confirmed that the “harnessing of inertia” had worked.

The DWP wants to implement the proposed changes in the mid-2020s, subject to discussions with stakeholders around the detailed design in 2018/19 and a subsequent formal consultation with a view to introducing legislation.

The two measures would bring about 900,000 young people into workplace pension plans and add an estimated £770m ($1.03bn) to total annual pension savings by that group in 2020-2021, government officials said. The period represents the first full year after planned increases to contribution rates.

Scrapping the lower earnings limit on all workers would bring an additional £2.6bn into pension saving, according to the report, and increase total savings to an estimated £3.8bn (€4.3bn, $5.09bn). The government also plans to review contribution levels once the 8% contribution rate is implemented in 2019.

The government will also test “targeted interventions” to promote retirement saving among the self-employed. Around 4.8 million individuals, or 15% of the UK workforce, describe themselves as self-employed.

Since 2012, when auto-enrollment was launched in Britain, workplace pension participation in the public and private sectors has increased to 78% in 2016 from a low of 55% in 2012, according to the government. But about 12 million individuals, or 38% of the working age population in the UK, are still not saving enough for their retirement.

Employers’ growing dread: Workers who can’t afford to retire

Posted on December 21, 2017 by Editorial Staff -

Withdrawing money from 401(k) accounts or suspending contributions to 401(k) plans reduces a worker’s retirement savings by an average of 14%. The shortfall could force employees to delay retirement and therefore raise employer compensation costs, according to a new report from MassMutual.

The mutual insurer and retirement plan provider has responded to plan sponsor concerns about the “financial wellness” of their workers—especially regarding the adverse effects of financial anxiety on productivity and of low savings rates on retirement readiness—by beefing up its service offerings in that area.

“We are expanding our analytics capabilities to help employers and their financial advisors project these costs and take appropriate actions to keep retirement savings on target,” said Josh Mermelstein, head of Retirement Readiness Solution at MassMutual.

MassMutual’s Viability Advisory Group was created to show employers and their financial advisors how much the under-utilization of retirement savings plans could cost them. If a workers’ savings can’t replace 75% of their pre-retirement income at age 65, they might not be able to retire.

MassMutual wants to be able to show employers the cost, in terms of older workers’ salaries and benefit expenses, if employees take loans or hardship withdrawals, suspend salary deferrals, or opt-out of automatic enrollment or automatic deferral and for those reasons don’t accumulate enough to retire on.

According to one MassMutual example, a typical 40-year-old worker who borrows 30% of his 401(k) savings might reduce his available retirement income by 15% and delay his retirement to age 70 instead of age 65, at great expense to his employer.

Younger employees are the most likely to do things that hurt their retirement readiness and tend to suffer the most as a result. A 29-year-old employee who is on target to retire at age 65 but then takes a hardship withdrawal reduces his or her retirement-readiness by 20% on average, according to MassMutual’s analytics. A 60-year-old employee who withdraws the same amount typically reduces his or her retirement readiness by only three percent on average.

The loss of retirement readiness reflects the value of lost interest earnings on the withdrawal before retirement, taxes and penalties, as well as a six-month suspension in salary deferrals, which typically happens when retirement plan participants withdraw savings.

MassMutual calculates the impact of activities that impair retirement readiness by using an employer’s own salary, benefits and retirement savings data. The underlying assumptions for specific behaviors are based on a benchmark created with data from the National Bureau of Economic Research, the Employee Benefits Research Institute, American Benefits Institute3, the United States Department of Labor, and MassMutual’s own experience with retirement plans.

A look at what’s driving the cryptocurrency market

Posted on December 21, 2017 by Editorial Staff -

Like most people, you’re probably just beginning to get your brain around the concepts of cryptocurrency and blockchains. It’s hard to ignore the craze. As of today, the market capitalization of a cryptocurrencies reached a record $634.7 billion (up from $518 billion last week), according to Coinmarketcap.com.

Bitcoin accounts for $277.3 billion of that, or about 44% (down from 54% last week). But Ripple became the world’s third largest cryptocurrency by market cap when its price jumped 71% to $0.79 last week. Ethereum and Litecoin have also experienced huge gains.

New applications for cryptocurrencies and blockchain technologies, especially in cross-border financing, are driving the market. Microfinance firms see the potential of providing cryptocurrency-denominated credit to make collateralized loans to small firms in emerging markets.

In Japan, GMO Internet Group plans a payment system that allows employees to receive some of their pay in cryptocurrency, according to Coindesk.com. Shipping firm Mitsui OSK Lines and IBM Japan intend to experiment with the application of blockchain technology to cross-border trade operations.

After its IPO listing last week, Longfin Corp announced the acquisition of Ziddu.com, a blockchain-based microfinance company that will lend to small and medium-sized enterprises (SMEs) against collateralized warehouse receipts in the form of “warehouse coins.” Warehouse receipt financing uses secured stored goods to be used as loan collateral. Depending upon the borrower’s risk profile, the interest will range from 12% to 48%.

Ziddu’s warehouse coin is a smart contract. It enables importers and exporters to use their Ziddu coins, which are loosely pegged to the value of Ethereum and Bitcoin. The importers and exporters can convert offered Ziddu coins into Ethereum and Bitcoin and use the proceeds as working capital.

Businesses needed about US $1.5 trillion more in credit than they could access in 2016, according to an Asian Development Bank (ADB). Small farmers in African countries and other frontier markets especially need micro-financing. African micro and SMEs need about US$190 billion more than they can get from traditional banks.

For emerging market companies that face a shortage of hard currency, cryptocurrencies like Bitcoin and Ethereum represent a potential alternative to US dollars. Said Longfin chairman Venkat Meenavalli, “Cryptocurrencies are expected to act as a global financing currency.”

Merry Christmas from RIJ!

Posted on December 21, 2017 by Editorial Staff -

Fifteen Best-Selling Variable Annuity Contracts (3rd Quarter 2017)

Posted on December 14, 2017 by Editorial Staff -

Source: Morningstar 3Q2017 Variable Annuity Sales and Asset Survey, December 13, 2017

The Crypto-Capitalist and His Digital Tontine

Posted on December 14, 2017 by Kerry Pechter -

An Irish entrepreneur based in Gibraltar wants to use cryptocurrency and tontines to disrupt the annuity industry in the way that Uber has disrupted the taxi business, Airbnb has disrupted the global lodging industry and Amazon has disrupted brick-and-mortar retail stores.

Dean McClelland, a 47-year-old former investment banker and self-described “crypto-capitalist,” isn’t the first to claim that tontines—a non-guaranteed, self-amortizing payout fund—can produce higher income for retirees than traditional annuities can deliver.

But he may be the first to market a financial product that weds the 17th century concept of tontines with the 21st century concepts of “blockchains”—the decentralized, encrypted, anonymous public ledgers—and the digital currencies in which blockchain transactions are conducted.

His company is called TontineTrust. This fall, McClelland has been assembling a management team, looking for hedge fund-type investors, and preparing an “initial coin offering” of a cryptocurrency he calls TON$. He spoke with RIJ recently from his office in the tiny British territory of Gibraltar, home of the famous limestone crag that guards the Atlantic entrance to the Mediterranean Sea.

‘What if we use a blockchain?’

McClelland, like quite a few people who are relatively new to retirement income, claims that his mother sparked his interest in the Boomer-aging opportunity.

“My mother was talking to me about the worries of the ladies and gents that she meets in her golf club,” he said. “Most of them have no clue about what rate they should be saving at today or about how much they can spend each year once they retire. In fact, whenever one of them dies, they wonder why they were saving at all.

“I did some research into the retirement income problem, and every solution had a serious flaw,” he added. “Then I started reading about tontines. I watched videos about them. They made perfect sense. Then I thought, ‘If you’re going to ask for people’s savings, but remove the insurance company from an annuity, you’d have to make it bulletproof.’ So we said, ‘What if we use the blockchain?’

This fall, McClelland (left) has been introducing himself to tontine and decumulation experts in North America like Jon Forman, Richard Fullmer, Gary Mettler, Michael Sabin and Moshe Milevsky.

“Dean is pretty far along,” said Forman, a law professor at the University of Oklahoma who has written about tontines. He calls them survivor funds. “Dean seems not to have a lot of regulatory hurdles in Gibraltar. And he probably has the ability to raise the money he will need to get tontine trusts off the ground.”

Richard Fullmer, an actuarial investment strategist who has co-authored a whitepaper for TontineTrust, told RIJ, “They’re at the pre-startup stage, trying to raise capital to create a real business. A lot of work has gone into putting together a prototype. It’s a marketing effort at this point.”

“[McClelland] has reached out to several people,” said Gary Mettler, a former Presidential Life executive specializing in income annuities. “Some have gone to Gibraltar and provided non-compensated support just because of the novelty of the effort. [TontineTrust] has a significant amount of money. They have legal support in Europe and product development support. They’re out front with it. It’s not under the radar.”

Like the ‘Hunger Games’

With annuity sales in the U.S. and the U.K. in a slump and Boomers’ need for lifetime income incompletely addressed, there’s both a need and an opportunity for new ideas around decumulation. Meanwhile, Bitcoin’s surging value this year has a lot of people pondering new uses for cryptocurrencies and the blockchain.

Like tontines, for example. If low payouts are the reason why near-retirees or retirees buy relatively few annuities, then tontines might be the answer. Since tontines don’t have lifetime guarantees (the participants share both the investment risk and the longevity risk), they don’t need life insurers to underwrite them. Forman and others estimate that 10% to 15% of the cost of a lifetime annuity goes to the life insurer (for insurance agent commissions, and for insurance company reserves, hedging, and profits).

Digitalization could make tontines even cheaper. By substituting the cloud-based blockchain for a traditional recordkeeper, investing the participants’ money in a global balanced exchange-traded fund (ETF), and capturing mortality credits more directly, a digital tontine could deliver as much as 40% more income per year to participants than an income annuity, McClelland said. He envisions an all-in fee of about 1% per year.

For those unfamiliar with life annuities or tontines, a definition of “mortality credit” may be in order. In a pure annuity or tontine, every participant’s money stays in the fund when they die and is credited to the surviving members. That’s the advantage of longevity risk pooling.

But annuities and tontines handle longevity pooling differently. In the annuity, an insurance company anticipates the future deaths and embeds a piece of the expected cash flows into the first and every subsequent fixed payment. In a tontine (although this design can vary), the payments climb significantly as the mortality rate of the members accelerates.

Tontines, like mutual funds, come in closed-end and open-end versions, and McClelland prefers the closed-end type. “I like the idea of, we get 10,000 people in the pool, all within two or three years of a certain age, and we position it like the ‘Hunger Games’: It’s your job to stay alive to win the ultimate reward. I think the competitive angle will appeal to people and help it sell.”

While the opportunity is huge, so are the challenges. McClelland imagines a globalized business, both retail and defined contribution. There are financing issues, asset management issues, actuarial issues, recordkeeping issues, regulatory and legal issues, marketing and distribution issues, and tax issues. How will TontineTrust deal with them?

For financing, McClelland will hold an initial coin offering. “We want to raise a ton of cash,” he told RIJ. “To do that we’ll issue 300 million tokens and sell them throughout the world. The management team will have some tokens. There will be some for recruiting and paying IARs (investment advisor representatives).”

In other words, he’ll be minting a new cryptocurrency, which he calls TON$, which can be traded like equity shares but also loaded onto debit cards for getting cash out of ATMs. “The tokens are traded on exchanges,” he said. “There is now $5 billion in bitcoin traded every day. There are new coins discovered all the time. Or you create them. We’ll do this instead of issuing equity or bonds.”

Asked to explain cryptocurrencies, McClelland offered an analogy. “Imagine that American Express came out and said, ‘From now on we are capping the number of rewards points we issue. If customers want to earn more points, they will have to buy them from other customers. You create a closed loop, which is a way of creating a market. That’s one way to think about digital currencies. There are cryptocurrency markets, and the tokens are the way we reference our transactions.”

Skin in the game

Distribution will be global, and TontineTrust will need an army of financial advisors to introduce the product to retail investors. He’ll promise them a five percent commission but spreads the risk by paying them in TON$, not their own local currency. “My feelings toward investment advisors are not the warmest. The conflicts of interest are just so massive,” McClelland said.

“But you can’t build a global distribution network without them. So you need to pay them. We can tell advisors, work with us, we’ll give you 5% of the money you bring in, by issuing you a tradable token. You can keep these tokens or sell them. They would help us get customers through the door.”

This business model requires advisors to put skin in the game by buying their own TON$ at the outset. In an interview, Gary Mettler told RIJ, “As I understand it, advisors can’t receive payments unless they also do a capital contribution of their own accord. If they plan do a $1 million in placements, for instance, they might have to put up $100,000 of their own accord. They’ll get paid in TON$. It’s as if I wanted to sell [an insurer’s] annuities and the insurer said, ‘Give us $25,000 in advance, and if the transaction screws up, they have cash.”

As for asset management, TontineTrust will invest in a low-cost, passively managed globally diversified balanced index fund. McClelland thinks it will be diversified enough not to need options-based risk management techniques, but he expects to hold a fair amount of cash to dampen volatility.

“We will smooth returns,” he told RIJ. “If we have a great return in one month, we’ll adjust the payout upward. If we have a bad month, we’ll adjust every future monthly payment downward. We will try to maintain as level a payout as possible until mortality credits kick in. I suggest that a significant amount of the assets will be in cash. Personally I feel more comfortable with that.”

Monthly payouts will be calculated by a robo-actuary or “smart actuary” and deposited as TON$ in the participants’ credit card or debit card accounts. “TontineTrust’s payouts would be better than a retail annuity even at the first payment. But they limit the amount paid out at the beginning,” Forman (pictured at left) said.

“They’re saying, we could pay $6,500 a year at the beginning by advancing some of the mortality credits and interest. But to make sure that we never have to cut payments in the future, we’ll just give them $5,500 and build up a cushion and then we’ll increase payments later on. You can play with it. In a traditional tontine, of course, the payouts would go up dramatically toward the end. Instead, Dean front-loads more of the payouts. The survivors will get more money, but they don’t want to get the bulk of it when they are too old to enjoy it.”

TontineTrust has reduced its regulation and compliance burdens by locating in Gibraltar, a business-friendly outpost of Britain. Almost twice as many companies as citizens are domiciled there. “My understanding is that they’ve received some kind of approval from Gibraltar’s regulatory agencies to create these products,” Fullmer told RIJ. “Places like Gibraltar are more on the forefront of innovation. That’s why Dean is there. Getting that approval is huge.”

As for overcoming the legal barriers to marketing a tontine in the US, where they’ve been more or less banned since a 1906 scandal, “You need a ruling that a tontine isn’t an insurance product,” Jon Forman told RIJ. “There are certain questions that need to be answered: Will a tontine violate the gambling or insurance laws of state X? Will the state tax the premiums? What will the reserves have to be? Another way to go is through ERISA?”

“This [retirement financing] problem needs to be solved,” McClelland told RIJ. With the fervor of a convert, he believes that cryptocurrencies, blockchain, smart contracts and tontines are the solution.

“Within two years, blockchain will be ubiquitous,” he said. “It’s close to being mainstream right now. It’s impossible to change the history of the blockchain. It creates a perfect audit trail. It’s like a triple entry accounting system. Madoff would never have happened if there’d been blockchain.”

Surveying the Damage of Low Interest Rates

Posted on December 14, 2017 by Anders Aslund -

For years after the 2008 financial crisis, policymakers congratulated themselves for having averted a second Great Depression. They had responded to the global recession with the kind of Keynesian fiscal and monetary stimulus that the moment required.

But nine years have passed, and official interest rates are still hovering around zero, while growth has been mediocre. Since 2008, the European Union has grown at a dismal average annual rate of just 0.9%.

The broad Keynesian consensus that emerged immediately after the crisis has become today’s prevailing economic dogma: as long as growth remains substandard and annual inflation remains below 2%, more stimulus is deemed not just appropriate, but necessary.

The arguments underlying this dogma do not hold water. For starters, measures of inflation are so poor as to be arbitrary. As Harvard’s Martin Feldstein notes, governments have no good way to measure price inflation for services and new technologies, which account for an ever greater share of advanced economies’ GDP, because quality in these sectors varies substantially over time. Moreover, real estate and other assets are not even included in the accounting.

The dictate that inflation must rise at an annual rate of 2% is also arbitrary. Swedish economist Knut Wicksell’s century-old concept of a “natural” interest rate—at which real (inflation-adjusted) GDP growth follows a long-term average while inflation remains stable—makes sense.

But why should the inflation rate always be 2%? And why aren’t services, new technologies, or, say, Chinese manufactured goods excluded from the measure of core inflation, alongside energy and food?

Given these shortcomings, it is worth asking if central banks’ doctrine of “inflation targeting” will suffer the same fate as monetarism in the 1980s, when policymakers obsessed over the supply of money. As with inflation today, central bankers then had no credible way even to measure the quantity of money, let alone deliver desired monetary-policy outcomes.

We should consider the effects of large budget deficits as another dubious form of stimulus. In 2017, economic growth in the EU swung up to an annual rate of 2.3%, after member states had finally reduced their budget deficits to an average 1.5% of GDP, down from 6.4% of GDP in 2010. Apparently, the fiscal stimulus after the crisis was not all that stimulating. By contrast, tighter fiscal policies in recent years seem to have had a positive effect.

Usually, a financial crisis gives rise to major structural reforms. But neither the 2008 crisis nor the subsequent euro crisis, which was caused by excessive public debt, led to significant deleveraging or Schumpeterian creative destruction in the affected countries. Clearly, the flood of government spending alleviated the need for difficult reforms, and allowed incumbent enterprises to shore up their positions with cheap finance. Any chance at structural renewal was smothered in the crib.

Among EU countries, average public debt increased from 73% of GDP in 2009 to 86% of GDP in 2016, far above the ceiling of 60% of GDP set by the Maastricht criteria. In Southern Europe, public debts are so large that they will depress growth for years to come.

And yet the past decade of ultra-low interest rates will likely prove even more pernicious than the years of deficit spending. There is no telling when or where the next financial bubble will burst. But we would do well to heed the findings of economists such as the late Charles Kindleberger and Harvard’s Kenneth Rogoff and Carmen Reinhart, and tread carefully.

After all, one can spot potential bubbles all over the place. Real estate and other asset prices are at record highs in much of the world. And the value of bitcoin in circulation has increased tenfold just this year, to $170 billion, although the cryptocurrency’s underlying value remains dubious at best.

Ultra-low interest rates have also created such a scramble for higher yields that even a poor, mismanaged country like Tajikistan can sell Eurobonds. For Tajik President Emomali Rahmon, that certainly beats seeking help from the International Monetary Fund, which would demand substantial reforms. Thanks to low interest rates, Rahmon can continue to misrule his former Soviet republic as he sees fit.

The many other victims of ultra-low interest rates should be all too apparent. Middle-class savers have watched the real value of their bank deposits decline annually at a rate of about 2%, and many retirees have suffered a real decline in their pensions, which are invested in safe assets and thus yield minimal returns.

The same is also true for many forms of insurance. Insurers themselves seem to be doing fine, but that is because they have been cutting benefits to the point that their customers will soon wonder why they bothered to take out policies in the first place.

Even banks are beleaguered. In advanced economies, traditional lenders are now subject to such a mass of regulation that they have had to withdraw from foreign activities. Not surprisingly, less regulated intermediaries in the shadow banking system have stepped in to seize much of their business.

Traditionally, the banking business centered around attracting deposits and issuing loans. But as a result of “low-for-long” interest rates, that share of banking has become ever smaller, and banks have had to charge ever-higher fees for various other financial services.

Moreover, low interest rates have diverted money toward less transparent and more speculative financial institutions, such as private-equity and hedge funds. Such institutions thrive on cheap credit, which enjoys more favorable treatment than equity financing under most Western tax regimes.

The benefits of low interest rates have accrued not to the population at large, and certainly not to the middle class, but to billionaires—the top 0.1%. The global wealth gap has widened significantly in the past decade alone, and especially in the US, where billionaires pay little to nothing in taxes thanks to special rules such as “carried interest.” And under the new Republican tax plan, they will pay even less.

The question now is whether Western institutions are strong enough to contain the global plutocracy that low interest rates have wrought.

Anders Åslund is a senior fellow at the Atlantic Council in Washington, DC. He is the author of Ukraine: What Went Wrong and How to Fix It and, most recently, Europe’s Growth Challenge (with Simeon Djankov). He is currently writing a book on Russia’s crony capitalism.

Tontines: A New Threat to Annuities?

Posted on December 14, 2017 by Kerry Pechter -

Insurance companies “don’t like the ‘t’ word,” one investment strategist told me. He meant tontines.

Just when life insurers and retirement providers thought they had weathered the interest rate nightmare, the robo nightmare, and the fiduciary nightmare, along comes a triple-edged nightmare: crypto-currencies, blockchain and tontines.

Just as global warming seems to bring stronger, more frequent hurricanes, the spread of digital technology seems to bring stronger, more frequent disruptions to the financial services industry.

The lead story in today’s issue of RIJ describes a Gibraltar-based startup, TontineTrust. Its founder, Dean McClelland, claims to be close to launching a tontine. It will be financed by a cryptocurrency offering, record-kept by blockchain, managed by a “smart actuary,” and represented on the web by one of those simple UX interfaces made famous by Betterment, et al.

First, what’s a tontine? It’s a fund that, like a life annuity, allows investors to pool their investment risk and longevity risk. In a life annuity, investors sell those risks outright to a life insurance company in return for a fixed guarantee lifetime income stream. In a tontine, investors retain some of the investment risk by accepting a variable income stream. And, by pooling instead of selling longevity risk, tontine participants can get bigger “mortality credits” for surviving.

Nothing is guaranteed, so no life insurer is needed. As York University finance professor and tontine historian Moshe Milevsky has written, that removes a lot of overhead and by itself significantly enhances the potential payout. Tontines can also hold riskier assets than an insurance company can, which implies bigger investment returns.

Opponents of conventional life annuities often claim that they’re no good because “when you die, you forfeit your money to the insurance company.” TontineTrust, in its whitepaper, says, “in a traditional annuity product, when a member passes away, their capital is in essence transferred to the shareholders of the life insurance company.”

Life insurers could do a better job of neutralizing this accusation, because it’s not exactly true. As Milevsky wrote to RIJ in an email:

“Any actuary will tell you that’s ridiculous. Rather, an assumption is made about the expected number of deaths in a particular year and then those who survive (lucky) are subsidized by those who don’t. Yes, there is some conservatism and profit baked-in into these assumptions, but it’s simply incorrect to say that money forfeited by the unfortunate is retained by the annuity company.”

If no annuity owner ever died, the life insurer’s payments would still contain mortality credits. If no tontine participant ever died, the participants would only get their fair share of the returns of the pool of assets. (The fact that a tontine requires human deaths in order to pay off may help explain why they’re not legal in the U.S.)

Sales of life annuities have always been low. If people don’t buy annuities because the payouts are too low, then tontines could replace annuities as retirement income tools. But what if that’s not the reason for low annuity sales? If Americans aren’t buying life annuities because a) they already own big inflation-adjusted life annuities in the form of Social Security or b) they want to keep savings liquid, or c) they want their children to inherit their money, then tontines will face similar marketing hurdles.

But in the hands of the right entrepreneurs, cryptocurrencies and blockchain (along with the Internet itself and newfangled APIs) could make tontines—or “survivor funds,” to use a less foreign and more upbeat term—a much bigger threat to insurance companies than they’ve been in the past.

Thanks to this year’s bull market in bitcoin, everybody’s talking about cryptocurrencies, smart contracts and blockchain, even if they don’t really understand it. Whether that enthusiasm will last, or whether it’s contagious enough to create enthusiasm for blockchain tontines, remains to be seen.

TontineTrust has an interesting marketing pitch. Imagine that you’re a contestant in the Hunger Games, McClelland says. You’re competing to stay alive, and the rewards for out-living everyone else are spectacular. (Tontines can be designed to make level payouts, but that would dilute the rewards for the few who live to 95 and beyond.)

Life insurers can take some comfort in believing that most older Americans will not hand over a big chunk of savings to a company they never heard of, especially one that uses a business model they don’t understand. Are Boomers going to give their money to a new company in Gibraltar or to a familiar old brand name that advertises during NFL and college basketball games?

But complacency would be a mistake. Life insurers like to say that they have a monopoly on longevity risk mediation. Digital tontines could prove them wrong.

The Segal Group acquires Touchstone Consulting

Envestnet acquires FolioDynamix

Mrozek to lead mid-sized plan sales at Lincoln

AdvisorEngine buys Junxure

Value of U.S. homes up 1.9 trillion in 2017: Zillow

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