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‘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.

Sales of fee-based VAs and FIAs on rise in US: Cerulli

Posted on December 14, 2017 by Editorial Staff -

New research from Cerulli Associates, a global research and consulting firm, discusses how the Department of Labor (DOL) Conflict of Interest Rule has slowed development along the variable annuity (VA) product pipeline. However, many insurers were being proactive in 2016 as approximately 25 of the new product filings were I-share VAs (i.e., fee-based VAs).

“A clear priority for most VA carriers is to manage the risk of their guaranteed benefits,” explained Donnie Ethier, director at Cerulli. “Insurers we surveyed listed the cost of risk management and hedging as being an obstacle; 40% named it as their greatest obstacle in the space. This is followed by designing and distributing fee-based solutions as well as competing annuity designs such as fixed-indexed annuities (FIAs).

“While sales of fee-based VAs, or I-shares, were growing even before the DOL Rule was announced, they declined in 2016,” he added. “Sales surpassed $2.8 billion as of 2Q 2017 putting them on pace to post slight year-over-year annual growth. The share class is important as the insurance industry looks to address the DOL. However, the wealth management industry had already been transitioning toward the fee-based compensation model and the DOL Rule will have the effect of accelerating this process.”

Cerulli believes that regardless of what fiduciary standard is used, it will cause change in how advisors do business. And the steady migration to the fee-based compensation model will continue. Most industry observers expect annuity sales to be under pressure for the next few years, but hold out hope for the future. One bright spot for the industry has been FIAs.

“FIAs sold a record $60.1 billion in 2016, but sales faltered in 4Q 2016, when it was revealed that FIAs would be subject to the same standards as VAs under the DOL Rule,” Ethier said. “Sales seemed to rebound a bit when full implementation of the rule was delayed. More broker/dealers and advisors are beginning to warm up to the FIA concept. The products have come a long way in terms of transparency and acceptance; however, like the majority of surveyed insurers, Cerulli believes much of the surge in FIA sales is a result of an inadequate supply of attractive VA guarantees. Therefore, advisors are looking at new retirement income solutions.”

Cerulli’s latest report, U.S. Annuity Markets 2017: Guaranteed Retirement Income in a Fiduciary World, provides analysis of the U.S. annuities market, examines the impact of the DOL Rule, and projects annuity sales.

VA sales drop in 3Q2017 despite equities rally

Posted on December 14, 2017 by Editorial Staff -

New variable annuity sales slipped 11.55% in the third quarter of 2017 to $20.6 billion from $23.3 billion in the second quarter. Sales were down 17.47% from the same quarter in 2016, according to Morningstar’s latest Variable Annuity Sales and Asset Survey.

Variable annuity assets under management (AUM) were $1.924 trillion in the third quarter, down about one percent (0.95%) from the second quarter but up about two percent (1.95%) from the third quarter a year ago.

Ameriprise Financial and Allianz, ranked eighth and ninth in quarterly sales, saw sales increases in 3Q2017. Thanks largely to its Index Advantage structured variable annuity, Allianz enjoyed a 26% increase in new sales from the previous quarter.

Index Advantage moved to 6th from 17th in new sales rank among VA contracts. The contract offers both buffered-crediting options or subaccount investment selections.

The remaining eight of the top 10 issuers experienced declines in new sales from second quarter 2017, however. Jackson National Life, TIAA, and AXA remained the top three issuing companies for new sales in the third quarter.

Jackson National posted new sales of $3.8 billion (18.89% market share); TIAA earned new sales of $2.6 billion (12.68% market share); and AXA generated $2.1 billion in new sales (10.28% market share). The top 10 issuers accounted for almost 81% of new sales.

Captive agents finished the third quarter in a near dead-heat with independent advisors in terms of VA market share. The captive channel, where TIAA, AXA and Ameriprise Financial dominate, accounted for 37.1% of sales. The independent channel, where Jackson National, Lincoln Financial and Prudential Financial stand out, accounted for 37.0%. Other channels represent less than 10% of the market with declines from second quarter results of one percent or less.

Home equity and purchases of long-term care services

Posted on December 14, 2017 by Editorial Staff -

Retirees spend more on home health care and use more unpaid informal care when the value of their homes (and access to home equity) rises. But their use of nursing home care doesn’t appear to be correlated with home equity, according to a study from the National Bureau of Economic Research.

In “Access to Long-Term Care After a Wealth Shock” (NBER Working Paper No.23781), Joan Costa Font, Richard Frank, and Katherine Swartz look at how changes in wealth, specifically housing wealth, affect decision-making around the three above-mentioned types of long-term care services.

“Housing assets represent 67% of the median per capita net worth of adults over the age of 66, and home equity is the primary self-funding mechanism for those who require long-term care,” they write. Their finding adds new evidence to the theory that retirees rely on their housing wealth to finance some types of long-term care services but offers no evidence that they use it to pay for nursing home care specifically.

The researchers analyzed the impact of variations in housing prices from 1996 through 2010–a turbulent period for real estate–on the use of long-term care services. Between 1998 and 2006, housing prices (and thus housing wealth) rose significantly; then it dropped more than 20% on average between 2006 and 2010, according to data from the Health and Retirement Study and the Federal Housing Finance Agency.

Spikes in house prices significantly increased homeowners’ use of both paid home health care and unpaid informal care but did not increase the use of nursing home care, the researchers found.

For instance, a $3,149 increase in wealth increased the probability that a homeowner would use paid home health care services by 0.25 percentage points. It was also associated with a 3% to 4% increase in the probability that a homeowner will use unpaid, informal care. In contrast, renters did not change their usage of long-term care services in response to changing local housing prices.

Half of adults who live to the age of 65 will eventually require long-term care services. Among those who do, these services will cost $133,700 per year in 2015 dollars, on average. For 5% of men and 12% of women, the total lifetime cost of long-term care will exceed $250,000. Medicaid covers about 35% of these costs. Elderly Americans and their families bear about half the cost of long-term care directly.

Vanguard uses blockchain to share index data

Posted on December 14, 2017 by Editorial Staff -

In a pilot program, Vanguard, the Center for Research in Security Prices (CRSP), and Symbiont are cooperating to use blockchain technology to “simplify the index data sharing process,” Vanguard announced this week. Index data will move instantly between index providers and market participants over one decentralized database.

“Investment managers will be able to instantly distribute, receive, and process index data, resulting in better benchmark tracking and significant cost savings,” said Warren Pennington, a principal in Vanguard’s Investment Management Group, in a release.

For several months, CRSP has distributed daily index data to Vanguard in a testing environment through Symbiont’s blockchain platform. Delivering the data via a blockchain and automating workflows with smart contracts has served to expedite data delivery, eliminate the need for manual updates, and reduce risks.

Currently, index data transmission, which is essential to many operations within the financial services industry, including portfolio construction and strategy execution, relies on multiple parties and distribution channels to reach investment professionals.

The success of this initial pilot will enable automation of CRSP index data delivery and intra-day updates over the private blockchain network in early 2018. Vanguard, Symbiont, and CRSP will also use the results of this initiative to influence future blockchain efforts.

Honorable Mention

Posted on December 14, 2017 by Editorial Staff -

Fujitsu settles excessive fee case for $14 million

In the settlement of a class action lawsuit over excessive retirement plan fees, Fujitsu Technology and Business of America, Inc., has agreed to pay $14 million to the participants of the Fujitsu Group Defined Contribution and 401(k) Plan. The settlement equals about $600 per class member and about one percent of plan assets, NAPA Net reported this week.

In addition to the payout, Fujitsu agreed to undertake a request for proposal (RFP) process “to reduce the amount of recordkeeping expenses paid by the Plan and already has voluntarily taken steps to reduce the amount of investment management fees paid by the Plan.”

In the suit, filed in 2016 in the U.S. District Court for the Northern District of California plaintiffs claimed that in 2013, total fees amounted to approximately 0.88% of plan assets (about $11,400,000), and that in 2014, total fees amounted to approximately 0.90% of plan assets (about $11,900,000) – fees that they claimed were almost three times higher than the average for plans of similar size – and that the suit alleged made it one of the five most expensive defined contribution plans out of approximately 650 plans with assets of more than $1 billion.

Holland ponders the effect of raising its pension age

If the Dutch government raised the country’s state pension age in line with life expectancy, it would mean that if people were to live till 110, they would have to work past their 90th birthday, according to the Netherlands Bureau for Economic Policy Analysis, or CPB.

The director of the CPB, Laura van Geest, called such an increase “unrealistic.” The Dutch government has already decided to increase the retirement age to 67 in 2020. One year later, the AOW age will increase again by another three months.

In a new report on working longer, the government’s accountants have warned that low-paid workers and the fast-growing group of self-employed workers (known as zzp’ers in the Netherlands) could face serious problems if the state pension (AOW) age keeps rising.

The government opted for this solution as a way of keeping the state pension affordable, with state finances under pressure since the financial crisis. Van Geest proposed a more gradual increase of the AOW age – for example an annual rise of three months – to enable the current generation of older workers to prepare for working longer.

According to Van Geest, such a slowdown of the rising retirement age would cost the government €1.1bn in 2021, but would be almost budget-neutral in the longer term.

The CPB also said that many self-employed hardly saved for their pension and that most of them had no short-term disability insurance, in contrast to full-time employees. This meant zzp’ers lacked a social safety net if they couldn’t work any longer before retirement age. Van Geest also suggested that the government should assess whether self-employed workers could be persuaded or forced to insure themselves.

“Although the government has made different choices for zzp’ers, research has shown that people don’t think properly about their future and don’t expect to get ill,” she said. “If they do get ill, it is too late to arrange something.”

If the retirement age rises, it would be cost-effective for the government to help people take better care of themselves, she added. Life expectancies of lower-educated workers was at least four years less than that of higher-educated employees because of higher rates of smoking, drinking, eating unhealthy food and not exercising, van Geest said.

T. Rowe Price offers cash flow management tool to participants

To enhance its “financial wellness” services for plan sponsors and participants, T. Rowe Price Retirement Plan Services has integrated a third-party online cash flow management tool, DoubleNet Pay, into its Workplace Retirement website.

Participants can use DoubleNet Pay to manage their “competing financial priorities by automating their spending and saving for short- and long-term goals,” according to a T. Rowe Price release.

With more plan sponsors becoming aware of the adverse impact of financial anxiety and retirement un-readiness on productivity and workforce management, major plan providers have been adding these types of functionalities to their menus of online participant services. Such tools are increasingly perceived as competitive necessities for plan providers.

Users of DoubleNet Pay can set up regular deductions from their bank accounts to pay bills, manage debt and fund an emergency savings account. “Each month the identified dollar amounts will be automatically deducted from an individual’s paycheck so they can clearly see and understand their disposable income,” the release said.

“DoubleNet Pay was created to help people easily pay their bills on time and to start a savings fund before spending their money on discretionary items,” “The tool is significant because individuals are able to enroll in the service annually for less than the cost of a bounced check or the late fee on a credit card,” said Brian Cosgray, DoubleNet Pay’s founder and CEO, in the release.

Quebec raises contribution, replacement rates of DC plans

TowersWatson, the benefits consulting firm, issued a report last week on a recently proposed Canadian law that would raise mandatory contributions to the Quebec Pension Plan (QPP), an earnings-related pension program within the Canadian social security system.

Bill 149, introduced in November, would increase benefits and employer/employee contributions gradually over a seven-year period starting January 1, 2019. It will also amend the Supplemental Pension Plans Act (SPPA), which applies to employer-provided plans in Quebec.

The proposed enhancements mirror those enacted by the federal government in December 2016 for the Canada Pension Plan (CPP), which applies to workers in the other Canadian provinces. Bill 149 calls for these changes to the QPP:

From 2019 to 2023, the income-replacement rate at retirement for a Quebec worker will increase in stages from 25% to 33.33% of pay, up to the year’s maximum pensionable earnings (YMPE).
From 2019 to 2023, a 2% increase in contributions (1% by employers and 1% by workers) up to the YMPE will be phased in to fund the above benefit enhancements.
Covered earnings for determining benefits and contributions under the QPP will be extended by 7% of the YMPE in each of 2024 and 2025, resulting in a final ceiling of 114% of the YMPE.
The resulting increased benefits will be funded, from 2025, by an 8% contribution (4% by employers and 4% by workers) on pay above the YMPE.

Bill 149 would also enact changes to the SPPA, affecting employer-provided pension plans registered in Quebec, notably the following:

Contributions made to reduce a letter of credit will be accounted for in the employee reserve maintained by the employer.
The appropriation and allocation of surplus assets during the life of a pension plan would become increasingly flexible, according to rules that differ from the current default provided under the SPPA.

“Employers and pension plan sponsors will be able to analyze how these changes impact costs, their labor forces’ retirement preparations and the goals they set for their pension programs,” a TowersWatson release said.

Quebec Bill 149 received its first reading on November 2, 2017; however, with the planned changes to the CPP coming into effect in 2019, it is expected that the QPP will be amended to follow suit, TowersWatson said.

U.S. collective investment trust assets reach $2.8 trillion in 2016

Assets in collective investment trusts (CITs) grew to roughly $2.8 trillion as of year-end 2016, representing a year-over-year growth of approximately 11.6%, according to Cerulli Associates, the global research and consulting firm.

The increase reflects the “increasing demand for lower-cost vehicles among institutions,” said Christopher Mason, senior analyst at Cerulli, in a release. “CITs can often be priced lower than mutual funds.”

“Nearly 95% of plan sponsors value the cost savings compared to mutual funds as one of the most important attributes of CITs. Similarly, roughly 90% of consultants feel that the cost savings compared to mutual funds is a very important attribute of CITs.”

“Managers that do not offer CITs should consider doing so, particularly for asset classes or strategies in which cost savings can be passed on to the end-investor,” says Mason.

Cerulli’s latest report, “North American Institutional Markets 2017: Strategies for Implementing Customized Services Across Client Segments,” provides coverage of the rise of institutional custom solutions, particularly liability-driven investing among corporate defined benefit plans, the increased use and adoption of CITs, and the ongoing influence of investment consultants.

Savers want safety and freedom in retirement: Wells Fargo

The Wells Fargo/Gallup Investor and Retirement Optimism Index held steady in the fourth quarter at +140, statistically unchanged from +138 in the third quarter. The index is near its September 2000 high of +147.

Three-quarters of non-retired investors in the survey have a 401(k) plan, and 57% say the most valued feature of their plan is the “match contribution from their employer.” The next most valued feature is the tax deferral on the money they contribute, which was noted by 33%.

Forty-six% say they would “save less” or “stop saving” in their 401(k) if the tax deferred status of their plan was taken away, whereas 42% say they would “save the same amount.” The survey was conducted by telephone with 1,015 U.S. investors Nov. 1–5, 2017, 67% of whom are non-retired and 33% of whom are retired.

Nearly all non-retired investors agree that “it is important to have a guaranteed income stream in retirement, in addition to Social Security,” but about half of investors are unsure about what products offer guaranteed income throughout retirement.

Six in ten (61%) want a guaranteed monthly income stream that lasts as long as they need it, even if that meant “giving up access to some of their money.” But 75% of non-retired investors also want the freedom to spend their money as they wish in retirement, even if that means they may run out of money “too soon.”

About half of non-retired investors (53%) have a savings “number” in mind for retirement. Non-retired investors with a specific number in mind say $1 million (median) is the right objective, although 29% say $500,000 or less.

Forty-one percent of non-retired investors have a specific savings number in mind and can also estimate what that sum will generate annually in retirement, but many of these estimates are unrealistic.

Nineteen percent of non-retired investors have a savings goal in mind and a somewhat realistic assumption of withdrawing up 1 to 5% of their savings every year throughout retirement. The rest are unsure about what their annual draw down would be, or they estimate more than a 5% annual withdrawal rate.

Wells Fargo Asset Management estimates that a five percent inflation-adjusted annual distribution carries a 20%–30% risk of running out of money in retirement, assuming a well-diversified investment portfolio.

Investors who say they need to save $1 million or more expect to draw 5% per year, on average, while those who say they need to save less than $1 million expect to draw an average of 7% per year.

Differences in contribution rates to retirement plans, by income and gender

Posted on December 7, 2017 by Editorial Staff -

Source: 2017 MassMutual Retirement Savings & Household Income Study. *Includes only participants in plans where an employer match is offered.

Cannex Launches Annuity Comparison Tools

Posted on December 7, 2017 by Kerry Pechter -

“Apple-to-apples” comparisons between annuity contracts or between different types of annuities have always been difficult to make. If it were easier for advisors to determine which contracts are the most “suitable” or in the “best interest” of a client, more of them might recommend annuities.

Cannex Financial Exchanges, the Toronto-based data company that serves the annuity industry in the U.S., and Canada, wants to remove that barrier to sales. The company has for many years offered a wizard for comparing SPIAs (single premium immediate annuities). It now offers tools for evaluating the relative merits of variable annuities (VAs) and fixed indexed annuities (FIAs).

The tools are called Cannex VA Analysis and Cannex FIA Analysis. Besides helping individual advisors match the right annuity contract or annuity rider with the right client, the product is designed to help brokerages and insurance marketing organizations pick contracts for their shelves and enable life insurers to perform competitive benchmarking.

Cannex, which serves more than 300 broker-dealers, banks, IMOs and other institutions employing some 350,000 advisors or agents, aggregates data on an estimated 50 SPIAs and DIA contracts, 100 multi-year guaranteed-rate (MYGA) fixed deferred annuity contracts, 200 FIAs and t 200 VAs from some 30 issuers who represent an estimated 85% of total sales. The firm receives almost four million requests for quotes on SPIAs each year.

“This has been about seven years in the making,” Cannex president Gary Baker told RIJ. “When I joined Cannex in 2010, the first thing that certain clients asked me was, ‘I like what Cannex does with income annuities. Could you please do that with the other annuity products?

“It was difficult for advisors or firms to pull apart the structure of these bundled contracts to assess the income benefits and the death benefits. So there was pent-up demand for transparency. But it was not until we bought the QWeMA business from Moshe Milevsky that we had the elements to do that.”

The biggest demand for these tools should come from advisors who hope to use the so-called living benefits (lifetime income riders) and death benefits of VAs and FIAs in retirement planning. These riders have turned VAs and FIAs, which once were mainly used as tax-deferred investment vehicles, into popular retirement income vehicles.

Advisors can use the tools to rank the living benefits of various contracts by their minimum monthly payment, average monthly payment (based on Monte Carlo projections of future performance), average income benefit over a lifetime (based on mortality tables) average death benefit and average “total economic benefit” (which combines living and death benefits).

To calculate those amounts, Cannex uses the S&P 500 Index whenever analyzing FIA rider values and a 60/40 stock/bond mix when analyzing VA rider values. “We’re running the same ‘electric current’ through every contract,” Baker told RIJ. “We’ve found that even if you vary the asset allocation to 50/50 or 70/30, it doesn’t seem to change a product’s score or its ranking. Some products do have ceilings on the equity allocation when a rider is chosen, and we’re in the process of adding that to the software.” The tools can compare contracts within or across product categories.

“We’ll also be able to create a heat map with 100 cells where the advisor can see the performance of a living benefit in various deferral periods. That’s in development right now,” Baker said. For example, the map could help advisors see the optimal number of years that a client should wait before “turning on” an income rider. The heat map could also show how a client’s age at purchase might affect the relative strengths of different products.

“For the first release [of the VA Analysis and FIA analysis tools] through our platform, we decided that the simplest approach would be to look at new annuity sales [rather than exchanges of one annuity contract for another]. We do support transfers off-platform, either for a back-end compliance group that wants to evaluate a transaction, or at the point of sale,” he added.

Cannex expects brokerages and advisors to rely on its tool as evidence of their efforts to establish the suitability (under FINRA rules) or “best interest” (under the Department of Labor’s BICE or Best Interest Contract Exemption) of a contract, and as an indication of due-diligence. To that end, it has obtained a letter from the Wagner Group, the Boston-based employee benefits law firm, testifying to its applicability to that purpose.

“In our view,” the Wagner letter said, “the Cannex Methodology annuity analysis and evaluation software would qualify as an analysis and evaluation tool that registered investment advisors and their IARs [investment advisor representatives] would be able to utilize in accordance with their duty to act with the care, skill, prudence and diligence of a prudent person under (i) the BICE’s best interest standard of care as applicable to rollover advice provided to Retirement Account clients and (ii) ERISA’s Prudent Man Standard of Care as applicable to non-rollover advice provided to Retirement Account clients subject to Title I of ERISA.”

But “even if there were no DOL rule, there would still be demand for this product,” Baker told RIJ. “The demand for this predates the DOL rule. We’ve shown the new tool to FINRA, and they gave us some feedback on how it can be used to establish the suitability of an annuity sale. A lot of companies are positioning their tools as “DOL” tools, but that’s not our position.”

Bitcoin is a Bubble. Blockchain is a Breakthrough

Posted on December 7, 2017 by Stephen Slifer -

Bitcoin is new and exciting. But bitcoin was developed in secrecy by a person or group of people whose identity remains unknown. Its whole purpose is to evade regulation which makes it particularly appealing to the darker side of society—drug dealers, arm sales, terrorists, sex traffickers—which gives it a close link to tax evasion and organized crime.

While it is being billed as “money,” it is not. It is neither a medium of exchange nor a store of value. Bitcoin purchasers today are doing so solely because they seek the anonymity or because they believe the value of a bitcoin will be higher tomorrow. Thus, it seems to us that bitcoin is more like a tulip than money and does not serve any socially useful economic function.

Having said that, the underlying technology on which it is based is revolutionary and could make identity theft by hackers far more difficult, and eventually eliminate the 2-3% transaction fee typically charged today on credit card transactions. It is important to distinguish between bitcoins and the technological advancement that was used to create it. One is useful, one is not.

The origination of the bitcoin is shrouded in secrecy. It was developed in 2008 by some person or a group of people, using a pseudonym—Satoshi Nakamoto—whose identity remains unknown. That is hardly a confidence-boosting start.

Bitcoins are being billed as a new form of “money.” But money is supposed to be a “medium of exchange” which means that it is a widely accepted means of payment. However, few legitimate businesses today accept bitcoin as a means of payment. Money is also supposed to be a “store of value”. But the value of a bitcoin is wildly unstable and its value can change by 10% or more in a single day. It is hard to imagine any investor choosing to park a large portion of his or her assets in bitcoins given this extreme volatility. Thus, bitcoins do not fit any conventional definition of “money”.

The appeal of bitcoin is that the technology on which it is based makes transactions largely anonymous which explains bitcoin’s appeal to the darker side of society. Most illegal activities from drug and gun sales to prostitution and the sex trade are done in cash. But money laundering is challenging, and bitcoins offer the perfect opportunity to convert a mountain of cash into a useable form without alerting authorities.

But the illegal nature of these transactions is sure to encourage regulators to keep a watchful eye on the market and could lead them to impose regulations which would dampen its appeal. It is also going to attract the attention of crime-busters like the FBI. Silk Road was an online black market best known as a platform for selling illegal drugs. It was shut down by the FBI in 2013 but, unfortunately, many Silk Road look-alikes have emerged.

While recognizing the downside of bitcoin, the blockchain technology on which it is based is revolutionary. In today’s world transactions are cleared by banks which verify that the purchaser has the funds available and transfer the proceeds to someone else’s account. Thus, transactions are controlled by banks. But blockchain can be thought of as a giant private sector database that performs those transactions without the bank or any other central authority.

Once a transaction is recorded the bitcoin network it is encrypted by a formula that can supposedly be unlocked only through a trial-and-error process and eventually the bitcoin proceeds find their way to the seller. The transaction is both anonymous and cost-less. Those are powerful advantages.

As a result, central banks around the world are working feverishly to determine whether adoption of blockchain technology could make it harder for hackers to engage in identity theft. Furthermore, in today’s world a merchant pays a 2-3% fee when a purchaser uses a credit card. Bitcoin technology could eliminate these fees to the middleman. Thus, bitcoin technology offers the opportunity to advance the financial payments mechanism into the 21st century.

As we see it, bitcoins have no socially useful economic function. They are not money and they facilitate the ability of drug dealers, gun sellers, sex traffickers, and terrorists to finance their operations. Bitcoins are only useful to speculators—hedge funds and high-speed trading firms in particular. For these reasons, in our opinion, bitcoin has limited appeal. But the blockchain technology on which it is based is revolutionary and will both enhance cyber-security and make the current payment mechanism far more efficient.

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