Archives: Articles

IssueM Articles

Ten-Year Impact of FY 2023 Budget Proposal

Posted on April 14, 2022 by No Author -

Breaking News

Posted on April 14, 2022 by Editorial Staff -

MetLife launches ‘private equity fund’ platform

MetLife Investment Management (MIM), the institutional asset management business of MetLife, Inc. (NYSE: MET), announced the launch of a private equity fund investment platform for institutional clients in concert with the closing of approximately $1.6 billion in commitments to a new MIM-managed fund-of-funds.

The new fund purchased a portfolio of approximately $1.2 billion of private equity and venture capital assets with funded and unfunded commitments totaling $1.2 billion from MetLife affiliates as part of a managed secondary sale transaction anchored by funds managed by HarbourVest Partners L.P., which served as lead investor.

MIM syndicated a portion of the transaction to other unaffiliated institutional clients. Following the closing, MIM intends to deploy approximately $400 million on behalf of the fund on new private equity opportunities.

“This new platform and secondary transaction speak to MetLife’s 30-year track record as a leading private markets investor and MIM’s ability to generate strong results in alternative asset classes,” said Steven Goulart, president of MIM and executive vice president and chief investment officer for MetLife. “This initial transaction provides us the opportunity to demonstrate the strength of our investment capabilities in private equity and venture capital and provide this offering to unaffiliated institutional investors, while also adjusting MetLife’s alternatives exposure.”

The portfolio of assets acquired by the fund consists of nearly 80 high quality private equity and venture capital fund investments diversified globally and across a range of sectors. The sale follows strong returns for the MetLife general account’s private equity portfolio, which held $14.0 billion in private equity assets at the end of 2021.

MIM’s private equity team consists of 12 professionals and has deployed nearly $18.0 billion of alternative investments on behalf of MetLife between 2007 and 2021. MIM had $669.0 billion in total assets under management as of December 31, 2021. Campbell Lutyens & Co. served as advisor to MetLife for this transaction.

S investors nationwide ages 45–75 from February 17 – February 28. 2022. The survey included 317 respondents with employer-provided defined contribution retirement plans.

Inflation, war affect asset allocations at pension funds: bfinance

Some 84% of respondents at 162 pension funds are at least moderately concerned inflation will erode their ability to reach their investment objectives, and 48% plan to increase the inflation sensitivity of their portfolio in 2022, according to an IPE.com report on a poll by investment consultancy bfinance.

Pension funds plan to hedge inflation by increasing exposure to infrastructure, private debt and real estate, the research found. Private debt (39%) and real estate (36%) were highly popular. Alternatives were a more popular inflation hedge than equities (18%) or inflation-linked bonds (12%).

“These asset allocation changes represent a continuation of longer-term shifts in favor of illiquid strategies and real assets,” said a bfinance spokesperson. “Investors’ concerns about inflation and rising rates are giving greater impetus to these trends.”

Only 8% of respondents plan to increase exposure to commodities as an inflation hedge. Only 9% of pension funds indicated they had increased exposure to commodities over the past 12 months. Half of the pension funds surveyed were from Europe, with the rest from North America, Asia Pacific and the Middle East & Africa.

Four in 10 pension funds said that Russia’s invasion of Ukraine and other recent geopolitical developments will or already have changed their ESG approach, either in-house or via changes made by their external asset manager partners.

Others said the conflict had not itself affected what they are doing, but it reinforced the need for a sophisticated ESG approach. “Emerging market country exposures, controversial weapons and fossil fuel firms are coming under particular scrutiny,” bfinance’s Kathryn Saklatvala said.

A Dutch pension fund told bfinance that the war in Ukraine caused it to rethink its weapons exclusion list, saying: “We will also place more scrutiny on role of state-owned companies and companies that otherwise act as extensions of the state, where the state was blacklisted under our ESG policy, even though Russia wasn’t blacklisted under our criteria prior to the invasion.”

Eagle Life enhances index annuities

Eagle Life Insurance Co., a subsidiary of American Equity Investment Life, has announced enhancements to Select Focus Series and Eagle Select Income Focus fixed index annuities.

Those products will gain two new index options and a Performance Rate Rider, adding to existing index options: the S&P 500 Index and the S&P 500 Dividend Aristocrats Daily Risk Control 5% Excess Return Index. The new options are:

Franklin Global Trends Index. This multi-asset index adds a global option to the Eagle Life portfolio. Comprised of both national and global asset classes, it “dynamically allocates across 10 global asset classes,” including equities, fixed income and alternatives.

Invesco Dynamic Growth Index. This index combines US equities and bonds, matching allocation strategies to one of four economic cycles — recovery, expansion, slowdown or contraction. It addresses risk by monitoring market performance and making intra-day allocation adjustments as needed.

Performance Rate Rider. This optional rider allows contract owners to increase participation rates on the annuity’s crediting strategy, which could potentially boost the amount of interest credited to it. The cost for applying the PRR to selected crediting strategies will not change for the length of the annuity’s surrender charge period.

Elizabeth Heffernan joins Micruity

Micruity Inc., has appointed Elizabeth Heffernan as Head of Partnerships and Consulting Strategy. A long-time Fidelity executive, she will “work closely with Micruity platform partners to optimize their product design for the data-connectivity of the Micruity annuity ecosystem,” according to a release this week.

Heffernan spent 24 years at Fidelity Investments in a variety of roles including marketing, sales and product, most recently working Investment Strategies. She also spent two years as the Managing Director of Business Development with Hueler Companies.

Elizabeth has spent the last 14 years working closely with asset managers and insurers on the design and connectivity of income products to the record keeping system, including significant work with Plan Sponsors and Participants to understand their goals and objectives in the Retirement Income space.

Elizabeth Heffernan is an active member of the Defined Contribution Institutional Investment Association (DCIIA) and is currently serving as Chair of the Retirement Income committee.

The Micruity Advanced Routing System (MARS) facilitates frictionless data sharing between insurers, asset managers, and record keepers through a single point of service that lowers the administrative burden for plan sponsors and enables them to turn retirement savings plans into retirement income plans at scale.

Net income of stock life/annuity firms tripled in 2021: AM Best

Posted on April 14, 2022 by Editorial Staff -

Publicly traded US life/annuity insurance companies saw a strong recovery in 2021, with net income more than tripling to $32.5 billion in 2021 from the previous year, driven largely by a 13% boost in revenue, according to a new AM Best report.

The industry saw a $35 billion increase in revenue to $297.5 billion in 2021, coming on the back of a modest increase in premiums, as well as increases in net investment income and realized gains, according to the report.

Companies continue to perform relatively well despite volatility in mortality from COVID-19 and still consider COVID-19 mortality as having an earnings impact rather than a balance sheet impact, suggesting no significant changes to reserves. Most carriers continue to experience higher mortality rates than usual; in 2021, mortality was higher for working-age populations, which affected individual and group life claims.

Other report highlights include:

Net investment income rose by roughly $11.9 billion to $85.7 billion. The persistent drag from the low interest rate environment continues to impact margins, but ongoing growth in general account invested assets, aided by premium growth and assets under management, has pushed investment income higher.

Of the 17 publicly traded companies in the analysis, 13 experienced a decline in capital, amounting to an overall 5% decrease. Share buybacks, which were halted during the pandemic, resumed in 2021; the return of share repurchases, as well as a modest increase in dividends paid, contributed to the decline in capital.

Total debt among publicly traded life/annuity insurers remained essentially flat in 2021 at $85.7 billion. Most of the companies that have been able to take advantage of the low interest rate environment and issue long-term debt have already done so, either to fund business growth or for upcoming maturities.

Investors continue to shift to indexed products from fixed-rate ones to seek protection from rising inflation. Traditional variable annuities experienced very strong growth, bolstered by favorable equity markets—while registered indexed-linked annuities continued the rapid growth of prior years.

How to Interpret the Proposed RMD Regs: Wagner Law

Posted on April 14, 2022 by Wagner Law Group -

The SECURE Act (the “Act”) made two major changes to the required minimum distribution rules under Internal Revenue Code (“Code”) Section 401(a)(9):

1. It extended the required beginning date for distributions from age 70-1/2 to age 72, other than distributions from tax-qualified plans which can be deferred until retirement except in the case of 5% owners, and

2. Except for a limited category of beneficiaries, it substantially reduced the period over which post-death distributions can be made, the latter element of which is sometimes referred to as eliminating the stretch IRA.

The IRS recently issued proposed regulations implementing these statutory changes, which apply to tax-qualified retirement plans, 403(b) plans, IRAs, and eligible deferred compensation plans under Code Section 457.

Compliance with the proposed regulations constitutes a reasonable, good faith interpretation of the amendments made by the SECURE Act. The proposed regulations would apply for purposes of determining required minimum distributions for calendar years beginning on or after January 1, 2022. For a 2021 calendar year distribution paid in 2022, taxpayers must apply the existing Code Section 401(a)(9) regulations.

The proposed regulations address the effective date for both of the SECURE Act statutory modifications. With respect to the new required beginning date of age 72, the SECURE Act provided that this change applied to individuals who attain age 72 on or after January 1, 2020. The statutory language could have been read as providing that if the individual died prior to January 1, 2020 and before attaining age 70-1/2, then the existing rule would apply. However, IRS took the position that the new rule should apply to any individual who would have attained age 72 on or after January 1, 2022 had he or she survived, which includes those born on or after July 1, 1949.

With respect to the new distribution rules, the relevant date for determining which set of regulations should apply to a trust providing for multiple beneficiaries depends upon the date of death of the oldest beneficiary.

As amended, Code Section 401(a)(9) retains the existing distribution periods for five (5) categories of beneficiaries, referred to as “eligible designated beneficiaries” or “EDBs”—surviving spouses, minor children of the individual, disabled persons, chronically ill persons, and beneficiaries who are not more than 10 years younger than the individual. With respect to this latter requirement, the proposed regulations take the position that there must actually be a 10-year age difference between the participant and the beneficiary. These EDBs can continue to receive payments based on life expectancy payments and are not required to receive the balance after 10 years.

For designated beneficiaries who are not eligible designated beneficiaries, all distributions must be completed by the end of the tenth year following the date of the death of the plan participant or the owner of an IRA. If the individual had already begun receiving payments, payments must continue to the designated beneficiary based on the designated beneficiary’s life expectancy, but if the individual had not already begun receiving payments, i.e., the individual died before his required beginning date, the designated beneficiary can defer all distributions until the end of the tenth year following the date of death of the plan participant or the owner of an IRA.

From the perspective of a defined contribution plan sponsor, the proposed regulations provide that, if the employee has an eligible designated beneficiary, the plan may provide either that the life expectancy rule applies or the 10-year rule applies. Alternatively, the plan may provide the employee or EDB with an election between the 10-year rule and the life expectancy rule. However, if the defined contribution plan does not include either of these options, the default option is the life expectancy rule. As a result, it is first necessary to determine which individuals qualify as eligible designated beneficiaries, and the proposed regulations provided this additional guidance:

1. Children. For defined contribution plans, the age of majority for a child is age 21, the age of majority in most jurisdictions (a few jurisdictions have younger ages, but none have older ages). However, defined benefit plans that were applying the definition of age of majority in the existing regulations may continue to do so. The proposed regulations do not define “child,” but as the SECURE Act commentary indicates that the intention was to limit it and certainly to exclude grandchildren, it appears that “child” means biological or adopted children of the participant.

2. Disability. With respect to disability, if the beneficiary is under the age of 18, the definition of disability is modified to be a “medically determinable physical or mental impairment that results in marked and severe functional limits, and can be expected to result in death or be of long-continued and indefinite duration.” A determination of Social Security disability is a safe harbor.

a. Date of Determination. The date of disability is determined as of the employee’s death. As a result, if the beneficiary is a minor child and the child becomes disabled after the date of the employee’s death, the child will cease to be an eligible designated beneficiary when the child attains age 21.

b. Documentation. The documentation requirements for disabled and chronically ill individuals, including the required certifications by licensed health care practitioners, must be provided by October 31 of the calendar year following the calendar year of the employee’s death.

3. Multiple Beneficiaries. Naming more than one designated beneficiary can be especially problematic. If just one of the group is not an eligible designated beneficiary, that preferred status is lost for the entire group. All must be eligible designated beneficiaries, or all must be treated as designated beneficiaries. There are two exceptions to this general rule. An eligible designed beneficiary who is appointed with one or more others who are simply designated beneficiaries may extend distributions over his or her life expectancy if:

a. The eligible designated beneficiary is a child. If the beneficiary is the child of the employee and had not reached the age of majority (age 21) at the time of the employee’s death, then that child will be treated as an eligible designated beneficiary.

b. The eligible designated beneficiary is such because he or she is disabled or chronically ill and is entitled to lifetime benefits in a multi-beneficiary trust which will not pay benefits to others prior to that individual’s death.

Separate accounting rules are applied to the individual interests of the beneficiaries in trusts with multiple beneficiaries.

A variety of issues arise in determining whether an individual is an eligible designated beneficiary, particularly where the nominal beneficiary is a trust. Without special “see-through” trust provisions, a retirement asset with a trust as beneficiary may need to be distributed by the end of the 5th year following the year the participant dies. The proposed regulations provide numerous examples, and the preamble to the proposed regulations discusses this issue in detail. We encourage all individuals to seek competent tax counsel for their unique situations.

As with most IRS regulations, the regulation package is lengthy – 275 pages. A great deal of guidance is presented in the preamble and the proposed regulations, which is relevant from both an employee benefit perspective and an estate planning perspective. This client alert is the first in a series of client alerts that will discuss different aspects of the proposed regulations.

To Make the Economy Better, Let’s Not Make It Worse

Posted on April 14, 2022 by Kerry Pechter -

Inflation is the obsession du jour, so on Tuesday I spent my lunch hour listening to economists discuss the “I” word in a live panel discussion broadcast on Twitter. Their main concern: That the Fed’s response to inflation might cause a recession.

The Bipartisan Policy Center (BPC) in Washington sponsored the one-hour colloquy. Its expert guests included Justin Wolfers, an economist at the University of Michigan, Diane Swonk, chief economist at Grant Thornton, and Xan Fishman, director of Energy Policy and Carbon Management at the BPC. Shai Akabas, the BPC’s Director of Economic Policy, moderated.

The broadcast coincided with this week’s release of the March 2022 Consumer Price Index (CPI) report. As you’ve probably read, the annualized “headline” inflation rate, which includes groceries and gasoline, was a fairly shocking 8.5%, with a 1.2% rise in March alone.

The “core” inflation rate, which excludes the cost of food and energy prices, was 6.5% year over year. It rose a mere 30 basis points in March. The near 50% increase in gasoline prices over the past year, and its effect on the cost of transporting food, presumably accounted for at least part the 2% gap between the headline and core inflation rates. But let’s not presume.

Irony is the currency of journalism, and the BPC’s Akabas initiated the conversation by invoking one. The general public appears to have interpreted the steady tattoo of news about inflation as an indicator that the US economy is sick, he has noticed. “Inflation is on everyone’s mind. People think the economy must be losing jobs, and that things must be bad overall,” he said.

But they’re getting it backwards, he added. Higher inflation is symptomatic of a strong economy—as measured by today’s low unemployment rates. People are working and spending. Job openings are going unfilled because so many people have jobs. The economy, therefore, is so good that it’s bad. To make it better, we must make it worse.

The experts discussed possible causes of the high inflation rate, and tried to weight them. Among the culprits:

High oil and gas prices. The price of oil rose 32% over the past year, the panelists agreed. The average price of gasoline in the US was $2.86 per gallon in March 2021 and $4.10 in March 2022, for a 43% rise. Xan Fishman said that China’s latest COVID-related lockdown could slow its economy enough to weaken its appetite for petroleum, thus removing some of the demand-driven upward pressure on oil prices.
Russia’s invasion of Ukraine. “Whats happening in Ukraine is not a fundamental underlying pressure” driving inflation, Wolfers said. “Russia won’t reinvade Ukraine.” He expects no further Russia-related energy shocks. They noted that gasoline prices tend to stay elevated even after oil prices decline; they didn’t explain why.
Congress’ big stimulus bill, passed last summer. Policymakers “had two choices,” Wolfers said. “A, they could under-do a stimulus or B, they could over-do a stimulus.” He said he would have recommended Path B “in a heartbeat,” but he might not have released so much of it in so short a time. “We could have made those investments more slowly and it would have worked just as well,” he said. Swonk agreed: “I’d rather we do too much than not enough.”
Release of pent-up consumer demand. Swonk said she has seen “hotel room prices going up from suppressed levels a year ago.” At airports, she said, the number of people passing through Transportation Security Administration check points has recovered almost to 2019 levels. Some restaurants remain closed because they lack adequate staff, not customers.
‘Shelter’ inflation. This is more a symptom than a cause, but with inflation there’s not necessarily a difference between the two; hence its ambiguity. Swonk noted the “surge in rents,” which tend to lag surges in home prices by about a year. “Even after some of the steam comes off overall inflation numbers, we probably won’t see an abatement in shelter costs,” she said.

Neither economist suggested any danger of “runaway” inflation. Neither invoked high government spending, high budget deficits or high long-term federal debt as possible sources of inflation. All of those factors were true during the Great Moderation, when headline inflation was regarded as sublimely low.

So what should the Fed do? No one seems to recommend Milton Friedman’s advice anymore, which was to reduce the money supply; it’s almost impossible to measure the “money supply.”

“The right answer is for the Fed to move closer to a ‘neutral’ interest rate, but that’s still some distance from where we are,” said Wolfers. [The neutral rate is the mythical Goldilocks rate at which the economy is neither shrinking or growing.] “Right now, the Fed is raising the nominal rate just to keep up with inflation. It’s not tightening, it’s just becoming less expansionary.”

As for the likelihood of a recession, Wolfers was less pessimistic than Swonk. “I’ve been surprised by the frequency of the use of the word ‘recession’ lately,” he said. “It puzzles the heck out of me. We’re creating 400,000 jobs a month. The economy is going gangbusters. So I don’t know where the recession talk is coming from.”

But Swonk worries that aggressive anti-inflation tactics by the Fed could tip the US economy from too hot to too cold by early 2023—especially if the Fed simultaneously raises the Fed Funds Rate and sells a bunch of the mortgage back securities (MBS) that it bought during past crises as a way to put a floor under falling bond prices. That purchasing process was known as quantitative easing; its reverse is called quantitative tightening. (Selling the MBS will increase their supply, putting downward pressure on their prices and, ipso facto, upward pressure on their yields.)

“The Fed would like to get the Fed funds rate to 2%,” said Swonk. (The Fed funds rate is the rate that banks pay to borrow reserves from each other. It was 2.43% in April 2019, after having been close to zero from December 2008 to December 2015.)

“But then there’s the economic quagmire of the Fed’s balance sheet.” She noted that quantitative tightening—a term-of-art for the sale of financial assets that are on the Fed’s balance sheet—“can amplify the effects of rate hikes in ways not necessarily well known. I’m afraid that the monetary policy could cause a recession or even a contraction in growth by the end of this year.”

No one mentioned the potential impact of rising interest rates on the stock market. Rising rates trigger instant mark-downs in the market prices of bonds. But the effect on stocks isn’t as direct. The stock market seems more like a JENGA tower: after an indeterminable series of quarter-point rate hikes, it will collapse. Nor did they mention that higher rates could make investments in new bonds more attractive for savers (and insurance companies).

During the past 20 years, neither Fed chairs Alan Greenspan, Ben Bernanke, Janet Yellen or Jay Powell figured out a way to raise interests rates from zero back to neutral without triggering some kind of economic calamity. Some fresh thinking may be required. Raising interest rates, driving down asset prices, and sparking layoffs can’t be the best way to neutralize a petroleum-driven inflation.

Note: My understanding is that the Fed doesn’t exactly “raise” rates. Instead, the Federal Open Market Committee, through its purchases and sales of bonds, reduces its “accommodation” of the banks’ demand for reserves–which banks need in order to cover the checks written by their customers. Banks then have to compete a little harder for Fed Funds, which they accomplish by bidding up the Fed Funds Rate.

Accommodation can become too much of a good thing. “Current US monetary policy is set at peak accommodation, which is putting upward pressure on inflation,” said St. Louis Fed President Jim Bullard in a recent statement. In his opinion, “This situation calls for rapid withdrawal of policy accommodation in order to preserve the best chance for a long and durable expansion.”

A ‘Cashback’ Pension-Building Card, from Germany

Posted on April 14, 2022 by Kerry Pechter -

A Berlin-based “pensiontech” firm and its venture-cap backers are betting that European Millennials will like the idea of saving sustainably for retirement whenever they use their Mastercard debit cards to buy lattes, burgers, or sneakers.

The company, Vantik, issues the Vantikcard (a white-label Mastercard debit card). It promises to invest 1% of the value of all Vantikcard purchases into the Vantik X fund—a fund of ESG (environmental, social, and governance) exchange-traded funds (ETFs).

The fund-of-funds was launched in December 2018, by Til Klein, a 30-something German with a resume that includes Boston Consulting Group and UBS wealth management. Vantik issued its first private-label Mastercard debit card in April 2021. (Before launching the card, Vantik pursued retail ETF investors in other ways.) As of last Friday, the Vantik-X fund had about €5.4 million ($5.88m) under management and an NAV of €6.29 ($6.85)—up 26% from its €5 ($5.45) opening price.

“Our goal is to radically simplify old-age provision,” says the Vantik literature. “Nowadays nobody needs long contract terms for complicated old-age provision products that are not worth it in the end anyway. With the Vantikcard we enable you to start your retirement provision. So that you can easily save a small part for your pension while paying.”

Vantik integrates several au courant technologies—smartphones, ESG investing, Application Programming Interfaces between banks and phones, Apple Pay and Google Pay, cash-back rewards—to capture the hearts and wallets of young Europeans at a time when EU regulators and corporations dither over defined contribution pension reform.

Not coincidentally, Klein is a member of the expert council on European pensions at EIOPA, the European insurance supervisory authority. He was one of the panelists in a recent webinar kicking off the Pan European Pension Product, or PEPP. According to Klein, Vantik has begun the process of obtaining a permit to offer a PEPP. For a recent RIJ article on PEPPs, click here.

Kickstarter

Before you click to your calculator to prove that people can’t spend their way to adequate savings at a rate of 100:1, give Klein credit for finding a way to tease European Millennials into linking their bank accounts to his Vantik X fund—and by making the relationship sticky.

Vantikcard users can’t liquidate the Vantik X fund shares that they buy with their cash back rewards until age 55 or later, when they retire. If they cancel the card, they forfeit the shares that the company bought for them with their rewards.

But the rewards are just a “kickstarter.” Once Vantikcard holders have begun buying Vantik-X shares with their cash back rewards, they will be encouraged to supplement their rewards-based shares with regular transfers from checking accounts at any German bank to the Vantik fund. Their own investments are fully liquid.

It’s all about behavioral finance. “The idea with Vantikcard is to use the 1% cashback as a kickstart into retirement savings and for customers to then save on top of the cashback. The biggest problem for many people is to get started. The Vantikcard helps with that,” a person with knowledge of the company told RIJ.

Klein told GQ magazine last December, “It’s not about supplementing your pension with the cash-back alone. The aim is to create a low-threshold entry opportunity. We want to take the fear out of old-age provision and finally break the vicious circle of constant procrastination.”

Somewhere down the road, annuities could enter the picture. At age 55, Vantik X shareholders can sell their shares and take a lump sum or buy an annuity that pays out a regular lifetime income, according to press reports. In the meantime, they pay an all-in annual expense ratio of 0.95%. That covers fund management, transfers, trading, etc. (The card itself is free and has no annual fee.)

There’s a “safety buffer”—though not a guarantee— designed to prevent loss of principal over the long run. According to one press report, “one percent of the funds collected from investors flows into a Vantik security buffer. The aim of the buffer is that at the beginning of retirement the investor has at least the amount that he has paid in… the safety buffer is managed by an independent foundation and compensates for a possible loss of capital at the beginning of retirement.”

Roundup time

Klein isn’t the first fintech entrepreneur to build a smartphone app that aims to make automated micro-investing easy for debit card-using young adults. In the US, the Acorns app gets people started investing by “rounding up” their purchases and buying ETFs with the difference. Betterment Visa debt card holders get various cashback rewards on purchases from select retailers. In Germany, there’s the Vivid Prime. It costs €9.9 per month and offers 1% cashback (up to €150) on all purchases, plus access to exclusive retailer discounts.

Vantik recently announced its own round-up feature. “So if you buy a coffee for 2.60 euros, you can automatically round up 0.40 euros and save for retirement. You’ll also be able to set your own savings rules so you can save at your own pace. One such rule could be that you pay five euros into the pension plan every time you’ve eaten burgers again,” Klein said in the GQ interview. The daily spending limit, assigned to each cardholder by Aion, Vantik’s bank, is between €400 ($435) and €1,250 ($1,358). Cardholders can earn cashback up to €100 ($109) each month.

Vantik’s approach may sound gimmicky—and far from proven—to someone at a hundred-year-old brick-and-mortar life insurance company. As a perk, for instance, Vantik invites members to personalize their plastic cards with special “artist, social media names and gamer tags.” But it’s a gimmick that seems to resonate with those who’ve grown up with iPhones in their hip pockets and buds in their ears. Two-thirds of his cardholders personalize their plastic cards, Klein said.

“This is exactly what we need for old-age provision: an easy-to-understand, low-threshold and motivating introduction,” he told GQ. “My tip: Don’t ask an expert, don’t read any books, don’t research on the internet, don’t try to calculate a pension gap. Just start first. The most important thing is to take the first step.”

Market Value of US Retirement Assets

Posted on April 6, 2022 by No Author -

Beware of double taxation on distributions: Wagner Law

Posted on April 5, 2022 by Wagner Law Group -

Due to an arcane mismatch in rules, you might inadvertently pay too much tax on distributions from your retirement accounts. Most states follow the federal rules so this may be a problem in only a few states. In those few, however, the mismatch could inadvertently result in you erroneously paying significant additional state income taxes. Massachusetts is an outlier, along with Pennsylvania and New Jersey.

Your state might not permit a 401k/IRA deduction

Withdrawals from retirement accounts are taxable for both federal and state purposes to the extent they are determined to consist of contributions that were not previously subject to tax. This makes sense. If you received a deduction for a contribution, such as to an IRA, or were not taxed on a contribution, such as to a 401(k) plan, the contribution, along with tax-deferred earnings on that contribution, become taxable when they are distributed. On the other hand, if you make a non-deductible contribution to an IRA you have a “basis” in that contribution and need not be taxed when that basis is returned to you.

Most states follow the federal income tax rules so the return of basis is the same for purposes of determining your federal income tax and state income tax. Massachusetts, Pennsylvania and New Jersey are the contrarians. In those states, any contribution that was not tax deductible when it was made should be withdrawn as a “return of basis” and not taxed. If you are not aware of this, you might report a distribution in the same amount on both your federal and state income tax returns. This would result in your paying tax twice: once when you made the contribution, and again when you withdraw it.

The Massachusetts mismatch

Since Massachusetts does not allow a deduction for amounts originally contributed to an IRA, the distributions are not taxable until the full amount of your contributions which were previously subject to Massachusetts taxes are recovered.

As an example, assume that in 2010 you made a $5,000 contribution to your IRA. If you met the income limitations for a deductible IRA for that year, you could have deducted the contribution on your federal income tax return. If you lived in Massachusetts, however, you could not have deducted the contribution on your state income tax return.

Assume that in 2021, the account has grown to $8,000 and you withdraw the entire account value. For federal tax purposes, you have no basis in the account because none of it has been previously taxed. You should add the entire $8,000 as ordinary income to your federal income tax return ($8,000 gross ordinary income equals $5,000 contribution that was previously deducted plus $3,000 gain that was tax deferred while accumulating in the IRA). For your Massachusetts return, you have already been taxed on the $5,000 contribution but the $3,000 gain has not yet been included in income. You therefore should add only $3,000 as ordinary income to your Massachusetts return ($8,000 less $5,000 return of basis equals $3,000 gross ordinary income).

Avoid overpaying state income tax

Taxpayers who are unaware of this disparate treatment may pay too much state income tax. It is critical, therefore, to know your state’s rules, or work with a competent tax adviser who does. It is also important to keep clear records of your non-deductible contributions throughout the years.

Nondeductible IRA contributions are recorded each year via IRS Form 8606. That form is also used to report distributions from traditional, SEP or SIMPLE IRAs (if you have a basis in them), as well as conversions to or distributions from Roth IRAs. These forms are important to have on hand as you prepare your returns for years in which you receive distributions. But Form 8606 does not report amounts that are not deductible in your state.

For added protection, we suggest that you also maintain a spreadsheet that records all of your IRA contributions, deductions claimed for contributions (state and federal), all distributions from those accounts, and related dates.

State rules vary significantly

Currently, eight states—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming—have no state income tax at all. If you are lucky enough to live in one of those states, mismatched basis is not an issue for you. Some states have income taxes but exclude distributions from employer-based plans and IRAs. Others exempt distributions but impose age or other limitations. Still others may pro-rate distributions so that each payment is partially taxable and partially a return of basis. As the example above illustrates, Massachusetts is among those that permit previously taxed contributions to be returned tax-free first.

Further complications arise when you move. If you lived in a state that follows the federal rules when you made a distribution but lived in a state where you could not deduct your contribution when it was made, the second state may or may not have a mechanism by which your basis can be recognized and be reduced from taxable income. Massachusetts considers the contribution to be a return of basis only if it was previously taxed by Massachusetts.

Vigilant taxpayers must become well-informed to navigate these complex rules. Once again, adequate records and professional advice are key to your success.

Prudential divests $31 billion block of in-force VAs

Posted on April 5, 2022 by Editorial Staff -

In a deal announced last September 15, Prudential Financial, Inc., has completed the sale of $31 billion of in-force variable annuity account values to Fortitude Re, a subsidiary of Bermuda-based Fortitude Group Holdings LLC.

The block of assets and liabilities consisted mainly of non-New York traditional variable annuities (VA) with guaranteed living benefits that were issued by Prudential Annuities Life Assurance Corporation prior to 2011, according to a Prudential release.

For several years before and after the 2008 financial crisis, Prudential was a leading seller of variable annuities that carried several types of guarantee that contract owners would receive an income for life, without ever giving up access to their money, even if their own principal was depleted by withdrawals, market volatility, or fees, as long as they agreed to keep their annual withdrawals within certain limits.

As a result of regulation and low interest rates, as well as uncertainty over when or how contract owners might use the benefit—or not use it all—the guarantee became expensive for Prudential to maintain. Other life/annuity companies have been in the same predicament; one solution has been to cut losses and sell the in-force blocks of VA contracts to reinsurers.

Reinsurers based in Bermuda and owned or affiliated with “private equity” or “alternative asset” managers are perhaps the most avid buyers of such blocks. AIG sold its reinsurance division to The Carlyle Group and other investors, who renamed it Fortitude Re, which is based in Bermuda.

RIJ has published a series of articles about this phenomenon, describing it as the “Bermuda Triangle strategy.”

Prudential will continue to service and administer all contracts in the block following the transaction. Prudential also will continue to sell protected outcome annuity solutions through other existing subsidiaries.

“This transaction is another key step in our journey to become a higher growth, less market sensitive and more nimble company,” said Prudential executive vice president and head of US Businesses Andy Sullivan. He said Prudential will focus on selling more of its “protected outcome solutions, like FlexGuard and FlexGuard Income.” Those products are less risky and therefore less capital-intensive for Prudential than VAs with guaranteed lifetime withdrawal benefits (GLWBs).

Debevoise & Plimpton LLP served as legal counsel to Fortitude Re. Sidley Austin LLP served as legal counsel to Prudential, and Goldman Sachs & Co. LLC served as exclusive financial advisor.

Prudential Financial, Inc., is a financial services company and global investment manager with more than $1.5 trillion in assets under management as of Dec. 31, 2021. It has operations in the United States, Asia, Europe, and Latin America.

The Fortitude Re Group includes Bermuda’s largest multi-line composite reinsurer, with unique competitive advantages and expertise to design bespoke transactional solutions for legacy Life & Annuity and P&C lines.

Fortitude Re is backed by a consortium of investor groups led by The Carlyle Group and T&D Insurance Group of Japan. Fortitude Re holds approximately $48 billion in invested assets as of Dec. 31, 2021.

Your Retirement Money Diet

Posted on April 5, 2022 by Kerry Pechter -

Dieting to lose weight can be a hassle, especially late in life, when, as Fats Waller sang, we don’t get around much anymore.

Spending at a “safe” annual rate in retirement is a type of dieting. But instead of kale salads, you consume dividends, interest, capital gains, Social Security benefits, pensions, annuity income or principal.

We tend to avoid income planning and dieting. Nonetheless, choosing a prudent withdrawal rate—not just in Year One of retirement but in every year thereafter—is important, especially for those who hope to tease a stable income from a vacillating portfolio.

Four percent used to be the default withdrawal rate from a 60:40 portfolio. But after a 40-year bull market in stocks and bonds, gurus like Wade Pfau warn that fallow seasons lie ahead. They advise retirees to trim that 4% rate by 10% (to 3.6%) or even 20% (to 3.2%) if they want their money to last 30 years.

In the latest edition of Morningstar’s quarterly magazine, investing experts Christine Benz, Jeffrey Plak and John Rekenthaler compare the hypothetical outcomes of different “safe withdrawal” methods, assuming a $1 million 50/50 portfolio, a start age of 65, and a 90% chance of not zeroing out before age 95.

The four methods are:

Withdrawing four percent the first year and then adding annual upward inflation adjustments when necessary, except in years when your investments are down.

Using the Required Minimum Distribution (RMD) method, which gradually raises the annual withdrawal rate as life expectancy shrinks.

The “guardrails” strategy that smoothes income by spending only moderately more in good years only moderately less in down years.

A 10% spending reduction after a losing year.

For additional perspective, they compared these methods with a “control” method of 4% plus inflation adjustments every year.

Each method revealed certain strengths and weaknesses in the face of identical hypothetical market conditions. The more annual income they permitted, the lower the portfolio’s value at the end of 30 years. Predictably, their specific rules resulted in smoother or choppier spending patterns over the years.

For Method One, where the retiree skipped inflation adjustments to a 4% withdrawal during down performance years, the average lifetime portfolio withdrawal rate was 3.45%, the standard deviation of cash flow was a mere 5%, and the retirees ended up with more money ($1.33 million) than they had at retirement.

Method Two, the RMD method, is designed to exhaust tax-deferred portfolios before death, produced a high average annual income (4.6%) but with a whopping cash-flow standard deviation of 49% and an ending balance of just $130,000.

Method Three, the “guardrails” method championed by Jonathan Guyton and William Klinger, offered a compromise between the two previous methods. It delivered a 4.07% average annual income, a standard deviation of 30% and an average ending value after 30 years of $740,000.

Method Four, which involved a 10% austerity haircut in losing years, resembled method one in its results. It produced an average annual income of 3.42%, a standard deviation of cash flow of only 8%, and a legacy value of $1.4 million.

In the real world, of course, there are a lot more variables than in a hypothetical world. Retirement security depends a lot on luck. You don’t know whether you’re retiring with the wind at your back or in your face. That’s especially true if you’re relying on risky investments to yield bread-on-the-table every night instead of covering all your basic expenses with a pension, Social Security, or an income annuity.

There are certain factors you can control. Retiring later means fewer years to finance. Claiming Social Security later allows you to qualify for higher monthly benefits for life, especially if you work and contribute to the program until age 70. Paying off your mortgage and other debts before retirement eases the pressure on your investments.

Safe withdrawal rates are hard to determine in part because no one knows how long he or she will live and need an income to live on. Annual adjustments to spending rates can also be labor-intensive. The uncertainty of such a plan can also create a lot of anxiety.

One alternative for someone with $1 million and a need for $40,000 a year in excess of Social Security would be to put $500,000 in a fixed-rate, 10-year annuity and the other half in a risky portfolio, and lean on withdrawals from the annuity when stocks don’t do well. That cushions you from market risk.

Or you could hedge your risk another way: Use $300,000 to buy a life annuity paying $18,000 a year for life (with 10 years certain) and draw another $22,000 (3.3%) from your remaining $700,000 investment portfolio. That cushions you from market risk and from longevity risk. Guaranteed annuities, appropriately customized and combined with invested assets, can buffer financial risks and let clients sleep more easily in retirement. Unless they are multi-millionaires, why should retirees expose all of their money to the mercy of the markets?

Breaking news

Posted on April 5, 2022 by Editorial Staff -

US among countries with lowest fund fees: Morningstar

Morningstar has published the first chapter of its biannual Global Investor Experience (GIE) report, which assesses the experiences of mutual fund investors in 26 markets across North America, Europe, Asia, and Africa. The report is now in its seventh edition.

The first chapter, “Fees and Expenses,” evaluates an investor’s ongoing cost to own mutual funds compared to investors across the globe. Morningstar assigns a grade of Top, Above Average, Average, Below Average, and Bottom to each market.

For the fourth study in a row, Australia, the Netherlands, and the United States earned Top grades as the most investor-friendly markets in terms of fees and expenses. They earned top grades due to their typically unbundled fund fees. Bottom grades went to Italy and Taiwan as markets with the highest fund fees and expenses.

“In many markets, fees are falling, driven by a combination of asset flows to cheaper funds and the repricing of existing investments,” said Grant Kennaway, head of manager selection at Morningstar and a co-author of the study.

“The increased prevalence of unbundled fund fees enables transparency and empowers investor success. However, the global fund industry structure perpetuates the use of upfront fees and the high prevalence of embedded ongoing commissions across 18 European and Asian markets can lead to a lack of clarity for investors. We believe this can create misaligned incentives that benefit distributors, notably banks, more than investors,” he said in a release.

Old-age poverty scarier than death for the unretired: Allianz Life

More than six in 10 non-retirees (63%) said they fear running out of money more than death, but fewer than half (46%) of retired respondents feel that way, according to the new 2022 Retirement Risk Readiness Study from Allianz Life.

Americans who are still balancing careers, family and saving worry more about their financial future today than they did a year ago. This is most true for those 10 or more years from retiring.

About two-thirds (68%) of pre-retirees believe they can afford to finance their future goals, down from 75% a year ago. Nine-tenths (89%) of retired respondents are confident about funding their future financial goals.

Key findings of the survey:

· 63% of non-retirees fear running out of money more than death, versus 46% of retired respondents

· 68% of pre-retirees feel confident about being able to financially support their future goals, down from 75% in 2021

· 42% of retirees said they retired earlier than expected, down from 68% in 2021; fewer did so due to healthcare issues (26% down from 33% in 2021) or unexpected job loss (15% down from 22% in 2021)

· 54% of non-retirees admitted to spending too much money on non-necessities during the pandemic

Allianz Life conducted an online survey, the 2022 Retirement Risk Readiness Study, in February 2022 with a nationally representative sample of 1,000 individuals age 25+ in the contiguous US with an annual household income of $50k+ (single) / $75k+ (married/partnered) OR investable assets of $150k.

American Funds and Morningstar partner for ‘Target Date Plus’

Capital Group, provider of the American Funds, and the Workplace Solutions group within Morningstar Investment Management LLC, a subsidiary of Morningstar, Inc., have announced a new target date service, Target Date Plus, with personalized allocation advice tailored to a retirement saver’s specific needs and objectives.

Employers can use the service as a qualified default investment alternative (QDIA). It blends the American Funds Target Date Retirement Series with Morningstar Investment Management’s experience delivering online investment advice through its user interfaces and network of integrated recordkeepers. Morningstar Investment Management serves 1.7 million managed accounts users.

“Target Date Plus underscores Capital Group’s efforts to provide more flexibility in how it distributes its investment services and is a natural evolution of the firm’s target date series. The service offers additional personalization by incorporating an individual’s age, salary, assets, savings rate, and company match rate,” according to a release this week.

“Morningstar Investment Management analyzes this information and provides the investor with a customized asset allocation and investment portfolio. Morningstar Investment Management can also inform the individual if and when they may benefit from allocating part of their savings to a guaranteed income annuity.”

Through its data network and integrations, Morningstar Investment Management obtains the necessary data points from recordkeepers to furnish and build out a personalized asset allocation and fund-level portfolio for each investor. That network also enables the service to return the investment recommendation to the recordkeeper to process and implement.

Prudential’s PRIAC life company upgraded by AM Best

AM Best has removed from under review with positive implications and upgraded the Long-Term Issuer Credit Rating (Long-Term ICR) to “aa” (Superior) from “aa-” (Superior) and affirmed the Financial Strength Rating of A+ (Superior) of Prudential Retirement Insurance and Annuity Company (PRIAC), headquartered in Newark, NJ. The outlook assigned to the Credit Ratings (ratings) is stable.

The ratings reflect PRIAC’s balance sheet strength, which AM Best assesses as strongest, as well as its strong operating performance, very favorable business profile and appropriate enterprise risk management.

The rating actions reflect full rating enhancement as a group member of the lead rating unit, Canada Life Assurance Company. PRIAC is considered critical to the group’s strategy and will be fully integrated into the group’s management operations with full support of the parent company.

CVS sells PayFlex to Millennium Trust

Millennium Trust, a provider of retirement and financial services for employers, institutions, advisors, and individuals, has agreed to acquire PayFlex Holdings, Inc., a provider of health savings accounts (HSAs) and consumer-directed benefit administration services, from CVS Health Corporation.

With PayFlex’s 2.4 million members and more than 2,500 clients, Millennium Trust will grow to about five million individual client accounts and $47 billion of total assets under administration, including HSAs, health reimbursement accounts (HRAs), flexible spending accounts (FSAs), COBRA administration, and direct-billing services.

Millennium Trust will also enter into a long-term commercial relationship with affiliates of Aetna Inc., a CVS Health company. PayFlex will remain Aetna’s preferred provider of HSAs and certain other consumer-directed benefit solutions for Aetna’s existing and prospective healthcare plan client base.

Upon closing of the transaction, Millennium Trust intends to invest in the PayFlex business, notably in the areas of sales, service, product, and technology. The combined company will try to deepen client relationships and growth across its various business lines.

Financial terms of the transaction have not been disclosed. The acquisition is expected to close in the second quarter, subject to the satisfaction of customary closing conditions and regulatory approvals. Until closing, the two companies will continue their usual business operations as independent entities.

Kirkland & Ellis LLP is serving as legal counsel to Millennium Trust. CVS Health has engaged Fried, Frank, Harris, Shriver & Jacobson LLP and Dechert LLP as legal counsel and Wells Fargo Securities, LLC as exclusive financial advisor.

The Standard offers ESG indexed annuity

The Standard has launched a new Enhanced Choice Index (ECI) single-premium fixed indexed annuity (FIA) that offers a choice of four index interest crediting strategies.

The ECI offers “the newly launched S&P 500 ESG Daily Risk Control 5% Excess Return Index, an option that aligns with the values of socially conscious clients,” said Rich Lane, vice president of Individual Annuities sales and marketing at The Standard, in a release.

The four index-crediting strategy options are:

S&P MARC 5% Excess Return Index (Ticker: SPMARC5P). It aims for more stable index performance with a diversified multi-asset index with volatility control.
S&P 500 Daily Risk Control 5% Excess Return Index (Ticker: SPXT5UE). It uses the existing S&P 500 Index crediting design combined with a volatility target.
S&P 500 ESG Daily Risk Control 5% Excess Return Index (Ticker: SPXESU5E). This index focuses on companies with improved environmental, social and governance characteristics and includes a volatility target.
S&P 500 Index (Ticker: SPX). It tracks the performance of S&P 500 companies.

For a fee, policyholders can receive an enhanced index participation rate, which offers the potential for the annuity fund to grow at a higher rate. The participation rates for the five- and seven-year versions of the ECI will be guaranteed for the entire term, except for the S&P 500 Index strategy. The participation rates for the 10-year version will be renewed annually.

The Standard’s ECI durations that last five, seven, or 10 years. Additional consumer benefits include the Guaranteed Minimum Accumulation Benefit, which guarantees 100% of the original premium at the end of the surrender charge period — minus any withdrawals and surrender charges — mitigating concerns about fees.

Advice is still a luxury item

Posted on April 5, 2022 by Editorial Staff -

A lack of investable assets considered adequate and associated advisory fees are barring investors from turning to financial advisors, according to the latest Cerulli Edge—US Asset and Wealth Management Edition.

Use of professional financial advice is positively correlated with household investable assets, Cerulli has found. More than half of participants with $500,000 or greater in investable assets rely on a professional for retirement advice, compared with only about one-in-five (21%) with household assets of less than $100,000.

Further, retirees with less than $100,000 in investable assets are more likely to have no source of financial advice. In sum, less than one-third (31%) of retirees indicate a financial professional is their primary source of retirement advice.

Close to one-third of retirement investors with less than $250,000 in household investable assets indicate they do not have enough investable assets to justify using an advisor—an issue many wealth managers are addressing with the incorporation of digital advice offerings.

“Services like retirement planning and decumulation become easier to scale across client accounts—regardless of minimums—with digital platforms,” said Shawn O’Brien, Cerulli’s associate director. “Some defined contribution managed account providers have implemented ‘hybrid’ advice platforms, which sit between traditional planning and advice and purely digital (‘robo’) advice to capture investors when they are ready for more customized investing and financial planning.”

Fees are another obstacle for participants. Nearly all (93%) view competitive pricing as at least somewhat important and the perception that professional advice is not worth the cost is a leading reason why participants eschew a financial advisor. However, particularly for wealthier investors nearing retirement, Cerulli suggests the value of working with a dedicated financial advisor or private wealth manager cannot be understated and, in many cases, is worth the asset-based fees.

Ultimately, providers offering financial planning and wealth management services should inform participants of the benefits of working with a dedicated financial advisor.

“While purely digital advice solutions tend to be lower cost and more easily accessible, many retirement investors prefer the comfort of working with a human advisor when making significant, consequential financial decisions,” said O’Brien. “Human advisors are arguably better equipped to address the behavioral finance side of investing than are purely digital solutions.”

White Paper Warns of PE-Led Life Insurers

Posted on March 31, 2022 by Kerry Pechter -

“Beware of Private Equity Companies Gobbling Up Life Insurance and Annuity Companies” is the title of a white paper published in January by the Center for Economic Policy Research (CEPR), a think tank in Washington, DC.

The article focuses on the phenomenon that RIJ defines as the “Bermuda Triangle” strategy. The author and co-director of CEPR, economist Eileen Appelbaum, has been tracking this phenomenon for several years.

She charges that, since private equity (PE) firms encountered barriers to distributing their often illiquid private assets as investment options in employer-sponsored retirement plans as investment options, they’re trying to access America’s savings indirectly—by managing hundreds of billions of dollars that life insurers have accrued by selling annuities to individuals and to corporate pension plans.

RIJ has been reporting on this trend since mid-2020. Two weeks ago, Sen. Sherrod Brown, chair of the Senate Banking, Housing and Urban Affairs Committee, asked the Federal Insurance Office and the National Association of Insurance Commissioners to furnish his committee with information on private equity’s forays into annuities.

In her white paper, Appelbaum sounds an alarm about the trend:

Private equity firms have already begun using insurance assets to invest in high fee alternative investments, including the PE firms’ own buyout, real estate, and debt funds. These activities raise the question whether, in the current absence of regulatory oversight, PE firms are engaged in self-dealing or have significant conflicts of interest. These possibilities are very real as PE firms can use these insurance assets to bolster the performance of their own struggling funds.

She also points out Bermuda’s role:

The opaqueness of PE, and the lack of transparency regarding its activities, makes regulation difficult. Federal regulation to cap the fees that policyholders pay are needed. And policies to assure that insurance companies whose assets are owned or managed by PE firms hold adequate reserves against their risky investments is vital. Some PE firms have already moved the headquarters of insurance companies they own to Bermuda, presumably because of lax regulation in that country.

Similar concerns were expressed, and ignored, prior to the Great Financial Crisis of 2008. Indeed, the current trend, like the mortgage boom, involved the transformation of bundles of below-investment-grade debt into investment-grade securities, whose various “tranches” promised higher returns per risk than similarly rated investments.

In the current case, the borrowers are not recipients of subprime mortgages, they are cellphone tower leasing firms or music royalty gatherers (think Spotify) with few hard assets but steady fee revenue.

I also appreciate the annuity industry’s perspective. In recent years, life insurers have relied on PE firms to relieve them of capital-intensive blocks of annuities that they had difficulty financing with low-yield corporate bonds. In a way, the PE companies have thrown much-needed life savers to life insurers.

Nonetheless there be dragons here.

It’s concerning that the private equity-controlled life insurers focus on selling long-dated fixed indexed annuities (FIAs). These products sometimes include optional living benefit/lifetime income riders, but the private equity companies don’t want the longevity risks or behavioral risks that living benefits carry. FIAs could crowd out other sources of retirement income simply because, with their term lengths of up to 10 years, indexed annuities provide PE firms with a stable source of long-term money.

Meet Corebridge, AIG’s ‘Bermuda Triangle’ Venture

Posted on March 30, 2022 by Kerry Pechter -

With the collaboration of private equity firms and a Bermuda-based reinsurer, American International Group (AIG) will soon spin off its $410 billion Life & Retirement division into Corebridge Financial, a new entity to be financed in an initial public offering. AIG expects an IPO this quarter, pending approvals.

It’s a launch that exemplifies what RIJ defines as the “Bermuda Triangle strategy,” in which private equity firms become involved in the US annuity business as strategic partners or owners of life/annuity and reinsurance companies in order to manage their annuity assets—which represent the retirement savings of millions of Americans.

In this case, the entities collaborating to give birth to Corebridge Financial bring expertise in one or more corners of the triangle. The primary life insurers inside Corebridge are AIG’s American General and VALIC; The asset managers are Blackstone and BlackRock. The Bermuda-based reinsurer is Fortitude Re. These strategic partners have interlocking parts.

Corebridge will be majority-owned by AIG, and run by the same SAFG’s CEO, Kevin Hogan. Blackstone owns 9.9% of Corebridge. Blackstone and BlackRock have agreements (see below) to manage hundreds of billions of dollars for Corebridge. Carlyle is the majority owner of Fortitude Re, having acquired it from AIG in transactions that began in 2018.

To remain a leader in the fixed annuity business, AIG may have had little choice but to follow this path. Corebridge is likely to have enough heft, expertise and scale to compete against the retirement services businesses of Apollo Management’s Athene, KKR’s Global Atlantic annuity business, and other private equity/life insurance combinations with similar structures.

Kevin Hogan, CEO of Corebridge Financial

Recently, MassMutual announced the creation of its own triangle. In the past two years, MassMutual acquired fixed indexed annuity (FIA) issuer Great American and helped start Martello Re in Bermuda. It is partnering with Centerbridge Partners as its alternative asset specialist. Smaller players, like Midwest Holdings, are also in the hunt.

The rivals in the fixed annuity space are all vying for a chunk of the trillions in Boomer savings. As AIG put it in the SAFG S-1 filing for the IPO: “There were about 56 million Americans age 65 and older in 2020, representing 17% of the US population. By 2030, this segment… is expected to increase by 17 million, or 30%, to 73 million Americans representing 21% of the US population.” They’re also competing to sell multi-billion dollar group annuities to corporations that want to cash out of their defined benefit pensions, a business known as “pension risk transfer.”

The Bermuda Triangle strategy, though complex, offers valuable synergies to its practitioners and their investors. Generally speaking, the life insurer sells long-dated annuities, gathering money much as a bank sells certificates of deposit. A substantial portion of this “permanent capital” may be managed by the asset managers, who lend it to relatively high-risk borrowers and bundle the loans, in some cases into collateralized loan obligations (CLOs) for sale to institutional investors.

All or part of the annuity liabilities are passed to one or more reinsurers (typically in favorable regulatory jurisdictions), which send “reserve credits” back to the life insurer, lightening the life insurer’s capital requirements. If all goes perfectly to plan, these measures give life insurers higher yields on their investments, enabling them to post higher profits, pay higher commissions to insurance agents, and offer higher crediting rates to annuity buyers. At the same time, asset managers earn fees on hundreds of billions of dollars of new assets. Direct investors in the life insurer, in the asset managers, and in the insurer all benefit as well.

But, as always in high finance, there are risks. Expressing concern about a complex strategy that brings hundreds of billions of dollars of Boomer savings under the management of a handful of immense asset managers, Sen. Sherrod Brown (D-OH), chairman of the Senate Banking, Housing, and Urban Affairs Committee, last week formally asked the Federal Insurance Office and the National Association of Insurance Commissioners (NAIC) to furnish his committee with answers about the possible effects of this concentration on the overall financial system.

Many publicly traded life/annuity companies that sold high volumes of annuities between about 2005 and 2015 have either withdrawn from the annuity business or retooled their retirement products groups. Hartford, AXA, ING, got out of the individual annuity business. MetLife spun off its life and retirement businesses as Brighthouse Financial in 2017. At the same time, private equity-owned life insurers have entered the annuity business, primarily selling fixed indexed annuities.

AIG Life & Retirement collected $13.7 billion in individual annuity premium in 2021 and $19.2 billion in total annuity considerations, according to the NAIC and AIG. That was second only to Apollo Global Management’s Athene Life, with $23.1 billion in individual and group annuity premiums, and Jackson National Life, with $19.6 billion in premiums, last year. (In mid-2020, Jackson National sold $27.6 billion in fixed and fixed indexed annuity business to Athene Holding.)

Last Monday, AIG announced that BlackRock, Inc., the world’s largest asset manager, would manage as much as $150 billion of the insurer’s assets. Under a separate, prior agreement, Blackstone entered into a “long-term strategic asset management relationship” to manage an initial $50 billion of AIG Life and Retirement portfolio, and as much as $92.5 billion within six years.

AIG’s restructuring has been in the works for about four years. Last October, the global multi-line insurer announced its intention to sell AIG Life & Retirement, which has about $410 billion in assets under management, through an IPO. This week, Corebridge Financial was revealed as the new entity’s brand name.

The size and price of the Corebridge share sale are yet to be determined, according to AIG’s SEC S-1 filing about the IPO, which indicated the business had total equity of $28.9 billion as of the end of 2021. An estimate of the IPO value, based on Blackstone’s $2.2 billion payment for 9.9%, is over $20 billion, according to press reports.

Six directors will be senior executives of AIG, according to a release this week. The CEO of Corebridge Financial will be Kevin Hogan, the current CEO of AIG Life & Retirement. According to SAFG’s March 28 S-1 filing:

“Following this offering, AIG will continue to hold a majority of our outstanding common stock, and as a result AIG will continue to have control of our business… In addition, Blackstone will have corporate governance, consent and information rights with respect to us under the Blackstone Stockholders’ Agreement.”

AIG Life and Retirement includes American General Life ($221 billion in assets), Variable Annuity Life Insurance Company (VALIC; $96 billion), US Life Insurance of the City of New York, and SunAmerica Asset Management (SAAM). American General alone reported individual annuity sales of more than $12 billion in 2021, making it one of the largest custodians of Americans’ retirement savings.

This week, AIG announced that Corebridge intends to offer senior unsecured notes. “The Notes will be offered in a private offering,” AIG said in a release, “exempt from the registration requirements of the US Securities Act of 1933, as amended.”

Peter Zaffino, AIG’s chairman and CEO, will serve as chairman of Corebridge Financial, and the board will include the following independent directors:

Alan Colberg, retired CEO, Assurant, Inc.
Christopher Lynch, former National Partner in Charge of KPMG LLP’s Financial Services Line of Business
Amy Schioldager, former Senior Managing Director and Global Head of Beta Strategies at BlackRock, Inc.
Trish Walsh, Chief Legal Officer, Stripe, Inc.

Jonathan Gray, President & Chief Operating Officer, Blackstone, Inc., joined the board in November 2021 following Blackstone’s 9.9% July 2021 equity investment in AIG Life & Retirement. Kevin Hogan, as CEO of Corebridge Financial, is also a member of the Board.

Corebridge plans to list its shares on the New York Stock Exchange under the symbol CRBG. JPMorgan Chase & Co., Morgan Stanley and Piper Sandler are leading the share sale.

Breaking News

Posted on March 30, 2022 by Editorial Staff -

Annexus and State Street partner on TDF with income rider

Annexus Retirement Solutions is partnering with State Street Global Advisors, the world’s fourth largest asset manager to develop a target date fund (TDF) with an embedded income solution for the defined contribution (DC) plan marketplace.

“This will become the second TDF income solution on the market that leverages the Annexus Retirement Solutions patent-pending Lifetime Income Builder design, which has successfully redefined how the industry can deliver in-plan lifetime income solutions in a TDF,” an Annexus release said.

The investment solution embeds Lifetime Income Builder (a product that employs group fixed indexed annuities (FIAs) with a guaranteed lifetime withdrawal benefit or GLWB) – within the automatic structure of a TDF.

State Street will manage the solution’s underlying assets and provide the index for the group fixed indexed annuity. The TDF will be available across multiple recordkeeping platforms. The new DC plan product offering is scheduled to launch in the first half of 2022.

By integrating Lifetime Income Builder into a TDF, the solution gives DC plan sponsors an efficient investment option which a plan sponsor could consider to be Qualified Default Investment Alternative (QDIA)-compliant. For participants, it offers a combination of liquidity, portability and ease of use leading to and in retirement.

The TDF design anticipates using three of the nation’s top-tier insurance providers to deliver lifetime income. This multi-carrier model allows the insurance providers to bid on pricing each month, which can help lower participant costs and deliver higher income benefits and better outcomes.

Annexus Retirement Solutions is providing its Lifetime Income Builder product and the Annexus Retirement Data Exchange (ARDX), a proprietary middleware solution that streamlines data communication and administration. ARDX also enables fund implementation and processing capabilities for the recordkeeper and all other parties.

SEC seeks more SPAC disclosure

The Securities and Exchange Commission has proposed new rules and amendments to enhance disclosure and investor protection in initial public offerings by special purpose acquisition companies (SPACs) and in business combination transactions involving shell companies, such as SPACs, and private operating companies.

“Nearly 90 years ago, Congress addressed certain policy issues around companies raising money from the public with respect to information asymmetries, misleading information, and conflicts of interest,” said SEC Chair Gary Gensler. “For traditional IPOs, Congress gave the SEC certain tools, which I generally see as falling into three buckets: disclosure; standards for marketing practices; and gatekeeper and issuer obligations.

“Today’s proposal would help ensure that these tools are applied to SPACs. Ultimately, I think it’s important to consider the economic drivers of SPACs. Functionally, the SPAC target IPO is being used as an alternative means to conduct an IPO. Thus, investors deserve the protections they receive from traditional IPOs, with respect to information asymmetries, fraud, and conflicts, and when it comes to disclosure, marketing practices, gatekeepers, and issuers.”

The proposed new rules and amendments would require, among other things, additional disclosures about SPAC sponsors, conflicts of interest, and sources of dilution. They also would require additional disclosures regarding business combination transactions between SPACs and private operating companies, including disclosures relating to the fairness of these transactions. Further, the new rules would address issues relating to projections made by SPACs and their target companies, including the Private Securities Litigation Reform Act safe harbor for forward-looking statements and the use of projections in Commission filings and in business combination transactions.

If adopted, the proposed rules would more closely align the required financial statements of private operating companies in transactions involving shell companies with those required in registration statements for an initial public offering.

The proposal also includes a new rule addressing the status of SPACs under the Investment Company Act of 1940, which is designed to increase attention among SPACs about this important assessment. Under the proposed rule, SPACs that satisfy certain conditions that limit their duration, asset composition, business purpose, and activities would not be required to register under the Investment Company Act.

The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

RetireOne hires McNeela and Cusack

RetireOne, the independent platform for fee-based insurance solutions, today announced the appointment of Tom McNeela and Jeff Cusack to two key leadership positions.

As the new Director of Client Experience, McNeela will provide Registered Investment Advisors and their clients with retirement solutions. His 25-year career includes experience as a life insurance and annuity wholesaler, operations back-office leader, and leader at a national sales education team for a Fortune 100 company.

Cusack brings expertise in product development, marketing, and distribution as RetireOne’s new Senior Managing Director, Strategic Accounts. He has more than 30 years of experience in financial services, at JPMorgan, Charles Schwab, Smith Barney’s Consulting Group (now Morgan Stanley) and, most recently, Nuveen Investments.

McNeela and Cusack join RetireOne shortly after the launch of Constance, a new, zero-commission contingent deferred annuity created in partnership with Midland National Life Insurance Company.

SEC aims to regulate securities dealers, market makers

The Securities and Exchange Commission (SEC) has proposed two rules that would require proprietary (or principal) trading firms, who assume certain dealer functions, and who act as liquidity providers in the markets, to register with the SEC, join a self-regulatory organization (SRO), and comply with federal securities laws and regulations.

“Requiring all firms that regularly make markets, or perform important liquidity-providing roles, to register as dealers or government securities dealers could help level the playing field among firms and enhance the resiliency of our markets,” said SEC Chair Gary Gensler in a release.

If adopted, the proposed rules would further define the phrase “as a part of a regular business” in Sections 3(a)(5) and 3(a)(44) of the Act to identify certain activities that would cause persons engaging in such activities to be “dealers” or “government securities dealers” and subject to the registration requirements of Sections 15 and 15C of the Act, respectively.

Under the proposed rules, any market participant that engages in activities as described in the rules would be a “dealer” or “government securities dealer” and, absent an exception or exemption, required to:

Register with the SEC under Section 15(a) or Section 15C, as applicable;
Become a member of an SRO
Comply with federal securities laws and regulatory obligations, including as applicable, SEC, SRO, and Treasury rules and requirements

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 60 days following publication of the proposing release on the SEC’s website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

‘Thematic Funds’ database available to Morningstar clients

Over the three years ending December, 31, 2021, assets managed by “thematic funds” more than tripled to $806 billion worldwide, according to Morningstar’s Global Thematic Funds Landscape Report, published this week. Thematic funds’ share of all equity fund assets worldwide was 2.7% at the end of 2021, up from 0.8% 10 years ago.

A record 589 new thematic funds debuted globally in 2021, more than double the previous record of 271 new fund launches in 2020. These funds attempt to harness secular growth themes ranging from artificial intelligence to Generation Z.

More than half of thematic funds globally survived and outperformed the Morningstar Global Markets Index over the three years to the end of 2021. However, this success rate drops to just one in ten thematic funds when looking at the trailing 15-year period. More than three-quarters of the thematic funds that were available to investors at the onset of that 15-year period were closed.

Europe is the largest market for thematic funds, accounting for 55% of global thematic fund assets, having expanded from 15% since 2002. In the US, thematic funds’ market share shrank to 21% from 51% over the same period.

Funds tracking Multiple Technology Themes, with $105 billion in combined assets, represent the most popular thematic grouping globally. These funds’ tendency to favor disruptive technology companies influences where they land on the Morningstar Style Box. In the US, 70% of thematic funds fit on the growth side of the Morningstar Equity Style Box, while just 7% landed on the value side.

Morningstar Direct users can access the Thematic Funds Dataset through the firm’s “Analytics Lab” to understand the Morningstar thematic funds landscape. They can see which open-end funds and exchange-traded funds are classified to a specific theme, where they fall in the thematic taxonomy, what their growth rate has been and which are most popular.

Personalized SMAs: A new product class

The latest issue of The Cerulli Edge—U.S. Monthly Product Trends, analyzes mutual fund and exchange-traded fund (ETF) product trends as of February 2022, assesses the future trajectory of personalized separately managed accounts (SMAs), and explores why asset managers are expanding their ETF and SMA capabilities.

Highlights from this research:

Outflows from mutual funds accelerated into February, with funds suffering $32.1 billion in net negative flows vs. just $13.0 billion in January. Assets fell more than 2% to $19.3 trillion; they are now down nearly $1.5 trillion from year-end 2021 ($20.8 trillion). ETF assets declined 1.1% to $6.8 trillion, but net flows remained positive at $79.7 billion.

Asset management firms are applying the algorithmic portfolio construction techniques of direct indexing to fixed income and active equity strategies, opening a broader class of products known as personalized SMAs.

Personalized SMAs offer customized investor solutions. Cerulli expects them to challenge mutual funds and other ’40-Act’ products. Asset management firms will need to integrate these solutions with managed account sponsors and position them with advisers and their clients.

The process of creating a vehicle-agnostic lineup, with products that fit the needs of distribution partners, is a process that does not stop when ETFs and SMAs go to market. Asset managers must continuously evolve their offerings to fit the changing needs and technologies of partner firms. “The more that an asset manager’s new vehicle offerings dovetail with a sponsor’s technology, and the more that they solve a problem for financial advisors using the platform, the better the chance of distribution success,” Cerulli said.

Goldman Sachs acquires NextCapital

Posted on March 30, 2022 by Editorial Staff -

Goldman Sachs Group Inc. is buying robo-adviser NextCapital Group, hoping that the online platform will help Goldman Sachs Asset Management offer managed accounts and digital advice to defined contribution plan participants, the New York-based bank said this week.

Terms of the deal, to be completed in the second half of the year, weren’t disclosed. Upon closing, NextCapital’s platform will join GSAM’s Multi-Asset Solutions business of Goldman Sachs Asset Management, led by Greg Calnon.

That group has about $220 billion in assets under supervision, making it the largest Outsourced Chief Investment Officer (OCIO) provider in the US and second largest globally by outsourced assets under management. It has offered custom multi-asset portfolios from Goldman Sachs and third-party asset managers for over 20 years.

NextCapital, based in Chicago, is an open-architecture digital retirement advice provider that partners with US financial institutions to deliver “personalized, customizable retirement planning and managed accounts through workplace retirement plans and IRAs.”

According to a release, the NextCapital’s “flexible, open-architecture” platform will enable “asset managers, plan sponsors, advisors and recordkeepers to meet individual investor demand for more digitalization, retirement income solutions, tailored strategies and insights.”

Goldman Sachs Asset Management says it supervises about $350 billion in defined benefit (DB) and defined contribution (DC) assets.

Goldman Sachs also partners with Chief Human Resources Officers (CHROs) and other wellness programs through its workplace wealth offering, Goldman Sachs Ayco Personal Financial Management. NextCapital’s managed account platform currently powers the Goldman Sachs Workplace Retirement Solution, a retirement program for small and mid-sized businesses.

“We will continue to invest in technology to improve the experiences and outcomes of retirement investors and better serve the employers, advisors and financial institutions that support the growing $10 trillion DC market and the even larger IRA segment.” said Luke Sarsfield, co-head of Goldman Sachs Asset Management.

‘SECURE 2.0’ Passes House, Moves to Senate

Posted on March 30, 2022 by Editorial Staff -

By a 414 to 5 vote this week, the House of Representatives approved the Securing a Strong Retirement Act of 2022 and sent it on to the Senate. Sponsored by Richard Neal (D-MA), the lengthy bill grants several long-sought items on the retirement industry’s wish-list.

Of the 414 voting yea, there were 216 Democrats and 198 Republicans. Five Republican congressman were opposed: Andy Biggs (AZ), Dan Bishop (NC), Thomas Massie (KY), Tom McClintock (CA), and Chip Roy (TX). The bill needed only a two-thirds majority to pass.

The legislation, widely known as SECURE 2.0 because it fills in some of the gaps left by a previous bipartisan retirement bill, the SECURE Act of 2019, does the following, among other things:

Makes auto-enrollment mandatory in private-sector retirement plans
Increases tax credits for costs associated with creating a plan at a small firm
Allows employers to match their workers’ student loan repayments with retirement account contributions
Raises catch-up contribution limits for older retirement savers
Delays required minimum distributions
Increases options to create lifetime income through annuities

Retirement industry stakeholders and their representatives praised the passage of the bill, HR 2954. In public statements, TIAA observed that the bill “builds on the SECURE Act, which took significant steps to expand access to lifetime income.” The Investment Company Institute hailed it for “increasing the age for required minimum distributions from retirement accounts.”

The American Council of Life Insurers CEO and president Susan Neely said, “Passage of this bill comes at a critical time for all savers but especially minorities.” The Insured Retirement Institute said the bill advanced its “primary public policy objectives—expanding access to workplace retirement plans and protecting lifetime income products.”

Below are 10 of the major provisions in the bill:

Expands automatic enrollment in retirement plans. Requires 401(k) and 403(b) plans to automatically enroll participants in the plans upon becoming eligible (and the employees may opt out of coverage). The initial automatic enrollment amount is at least 3 percent but no more than 10 percent. And then each year that amount is increased by 1 percent until it reaches 10 percent. All current 401(k) and 403(b) plans are grandfathered.

Modifies credit for small employer pension plan startup costs. The three-year small business start-up credit is currently 50% of administrative costs, up to an annual cap of $5,000. Section 102 makes changes to the credit by increasing the startup credit from 50% to 100% for employers with up to 50 employees.

Allows 403(b) custodial accounts to invest in collective investment trusts. It also amends the securities laws to treat 403(b) plans like 401(a) plans with respect to their ability to invest in collective investment trusts, provided that: (1) the plan is subject to ERISA, (2) the plan sponsor accepts fiduciary responsibility for selecting the investments that participants can select under the plan, (3) the plan is a governmental plan, or (4) the plan has a separate exemption from the securities rules.

Increases the required minimum distribution (RMD) age. Currently age 72, the RMD age will be 73 starting on January 1, 2022. It will increase to age 74 starting on January 1, 2029 and age 75 starting on January 1, 2032.

Indexes the current allowable increase on IRA contributions after age 50 ($1,000) to inflation, starting in 2023. Also, the current limit on catch-up contributions for those over age 50 is $6,500 ($3,000 for SIMPLE IRAs). The new law increases these limits to $10,000 and $5,000 (both indexed), respectively, for individuals who have attained ages 62, 63 and 64, but not age 65.

Allows offering de minimus financial incentives to 401(k) participants. Lifts the prohibition against offering modest cash incentives such as gift cards to encourage contributions.

Eliminates certain barriers to the availability of life annuities in qualified plans and IRAs. Annuities that provide rising benefits are currently prohibited from tax-deferred plans. This change allows annuities that offer annual increases of only 1 or 2%, or return of premium death benefits, or period certain guarantees.

Removes the cap on contributions to Qualified Longevity Annuity Contracts (QLACs), a type of deferred income annuity. The cap is currently 25% of tax-deferred savings. The new law also facilitates the sales of QLACs with spousal survival rights and clarifies that free-look periods can be as long as 90 days.

Facilitates the creation of a new type of exchange-traded fund (ETF) that is “insurance-dedicated.” This change would allow ETFs to be offered as investment options within individual variable annuities.

Creates a national online “lost and found” for Americans’ retirement plan accounts. The section also directs the Department of Labor, in consultation with Treasury, to issue regulations on what plan fiduciaries must do to help find missing participants and reunite them with their accounts.

Allow sponsors of 401(k), 403(b) and 457(b) plans to provide employer matching contributions on a Roth basis. Under current law, plan sponsors are not permitted to provide employer matching contributions in their 401(k), 403(b) and governmental 457(b) plans on a Roth basis. Matching contributions must be on a pre-tax basis only. Section 604 allows defined contribution plans to provide participants with the option of receiving matching contributions on a Roth basis.

Top 25 Companies and Groups for Annuity Considerations, 2021

Posted on March 30, 2022 by No Author -

Who Runs EBSA? It Matters

Posted on March 24, 2022 by Kerry Pechter -

Cherry blossoms decorated the nation’s capital this week—pink flowers on a white birthday cake. Suppose, while admiring the florescent trees, I ran into a guy who never votes. The major political parties are like the Tweedle brothers, he says. It doesn’t matter who wakes up in the West Wing.

That’s not necessarily so, I’d say. I would suggest that we walk over to the Francis Perkins Building at 200 Connecticut Avenue NW, where the Department of Labor (DOL) lives.

A model of mid-1960s modernism, the steel-and-limestone Perkins Building has the charm of an IBM punch-card. It is named for the first woman cabinet member—appointed by Franklin Delano Roosevelt as Secretary of Labor in 1933. Perkins helped craft the New Deal.

The building also houses the Employee Benefit Security Administration, or EBSA. EBSA’s career attorneys write regulations that follow the laws that Congress passes. But EBSA’s chief is a political appointee, so his or her initiatives and rules tend to reflect the political predilections of the incumbent president and Labor Secretary.

That’s why any adviser who recommends rollovers to plan participants, or any asset manager that wants its unconventional funds placed as options in 401(k) plans, or any life insurer that favors annuities in defined contribution plans, should care who runs EBSA at any given time.

In the Trump administration, for instance, Labor Secretary Eugene Scalia and EBSA chief Preston Rutledge shelved the Obama Administration’s strict “fiduciary rule” and discouraged the use of ESG (Environmental, Social and Governance) funds in 401(k) plans. But they are gone, replaced by Biden’s team.

Ali Khawar

What policies is Biden’s EBSA likely to favor? It’s probably going to resemble Obama’s. We don’t know for sure, because EBSA is currently led by an acting Assistant Labor Secretary, Ali Khawar. (The Senate has not yet confirmed President Biden’s EBSA nominee, labor lawyer Lisa M. Gomez.)

Last week, Khawar, a veteran DOL attorney, was the featured speaker in a webinar hosted by the American Academy of Actuaries. To learn about EBSA’s current initiatives, we tuned in. Here are some of the themes Khawar touched on, followed by his comments:

Conflicts of interest

EBSA has a “Conflict of Interest” project. As we move from the defined benefit plan universe to a defined contribution and also an IRA universe, it’s important that people can trust and rely on the advice they receive. That’s even more important in a universe where they are responsible for making their own financial decisions.

Most Americans are not actuaries. They need advice on how much to save, how to invest, and how to take Social Security. We don’t have a system that equips individuals well enough to make these decisions on their own.

In spite of a lot of changes and efforts made over the years by DOL and others, it’s still the case that you may not be getting advice you can rely on. It depends largely on the product or the firm you’re dealing with. It’s important that there’s a level set of parameters across the board.

As a consumer, you shouldn’t have to figure out, ‘Which exemption [from a prohibited transaction] is the adviser I’m talking to using. Are they regulated by the NAIC? FINRA? Am I in a state that has adopted the fiduciary corollary rule?’ So we are focused on leveling the regulatory playing-field for the nation. We’re trying to bring more trust to the system, and we’re trying to address equity issues and get more people to participate. Some communities have lack of trust in financial services industry. That’s the Conflict of Interest project.

ESG investing

The issue of “Environmental, Social and Governance” or ESG investments is a long-running DOL focus. On President Biden’s first day in office, he asked the DOL to review the Trump administration’s actions on ESG. We had heard feedback on ESG from ERISA stakeholders. Their message was that the previous administration’s policy statements had a chilling effect, to the point where sponsors felt there was reason to exclude ESG investments.

We proposed an ESG rule last year. The comment period is closed and now we’re working on the final rule. We don’t think the DOL should say whether defined contribution plan sponsors should or shouldn’t take ESG into account when choosing investments. ESG is going to be financially material in some situations but not in others. We think the prior administration’s rules, which are still in effect, put a ‘thumb on the scale’ and took that decision-making power away from the plan sponsors. [That power] is critical to their analysis of risk and return; we expect them to take all of that into account. Our proposed rule is meant to straddle those concepts and to allow ESG investments but not to force them on anyone. That rule is a priority for us. We are currently digesting comments on that and hope to issue a final rule as soon as possible.

Prohibited Transaction Exemptions (PTEs) and Cryptocurrencies

We’re also accepting comments on prohibited transaction exemptions. We have proposed a way to look at processing applications for PTEs. We’re hoping to introduce some efficiency into the process, and hoping that people can give us more complete PTE applications.

As of March 10, we published Compliance Assistance Release 2022-01 on cryptocurrencies. We’ve been thinking about cryptocurrencies for months. We had received reports that certain retirement plan service providers were encouraging plan sponsors to make cryptocurrency investments directly available to their participants, so that they could buy Bitcoin or other cryptocurrencies through their plans. We found that concerning.

There are custodial, valuation, and financial literacy issues around offering cryptocurrencies to participants. What exactly are the messages that participants are getting? Do they see cryptocurrencies with their eyes fully open? Fiduciaries aren’t necessarily following these issues. On March 9, the president put out an executive order on cryptocurrencies. It asks a number of federal agencies, including DOL, to think about what a regulator framework for cryptocurrencies might look like. We think that the US must play a leadership role in establishing that framework and setting up a regulatory structure. We need to get the consumer protections right. As we’ve seen with other asset classes and innovations, they have been harmful for consumers and especially for diverse communities. The Biden administration is concerned about consumer protections in crypto. We believe 401k fiduciaries should be quite skeptical before they allow investments in cryptocurrencies and that they should exercise caution especially regarding direct investments in crypto.

Retirement income

We think it’s important to talk about lifetime income as lifetime income. Annuity is just one form of lifetime income. We don’t favor securities over insurance. We’re focused on making sure that plan participants have the income they need so that they don’t rely on public programs. There are a lot of different paths to achieve that goal.

Can we establish a national retirement policy for the whole country? I’m an optimist so I want to say yes. There have been conversations ever since ERISA was passed [in 1974] on how to ensure broader coverage. That conversation thread has never gone away. Today we’re having a conversation about Pooled Employer Plans.

In the past we had a similar conversation about SIMPLE IRAs. The question is the same: How do you get more employers into the system and how do you make it easy for them to set up a retirement plan? Everyone is coalescing around these important questions. To make that a reality, we’re having meetings like our meeting here today. That’s happening across the board. We especially want to pay attention to people who’ve been left out of the discussion in the past. The situation we’re in creates important conditions for needed improvements.

Investor education

Individuals need to make decisions about how much to save and whether they’re on track for secure retirement, and they have to know how to make their money last a lifetime. Most people don’t have those skills. So the question is, how to educate them about what it means to maximize the employer’s matching contribution, or what will be the impact of increasing contributions? How do we convey to young people the importance of saving early, and how to help the near-retiree think about retirement income. Disclosure is helpful to a point.

Then comes decumulation. At retirement, an element of choice paralysis can set in. Many people don’t know what to do with the money that they’ve accumulated. Taking a lump sum or a phased distribution from a defined contribution plan are common solutions. But we need to make other options more broadly available. Take-up of lifetime income solutions is low. The ‘fear element’ is a problem. Health also plays into it. In talking about retirement security, we tend to think in purely financial terms. But the amount of money that you will need in retirement depends in part on your personal health and on your level of health care spending. That makes the lifetime income issue especially interesting and challenging.

Europe’s Borderless New DC Plans

Posted on March 24, 2022 by Kerry Pechter -

Citizens of any of the 30 countries in the European Economic Area can work at jobs in any of the other member countries. As of last Tuesday, March 22, they can participate in equally border-agnostic retirement savings plans, called Pan European Personal Pensions, or PEPPs.

Not to be confused with the “Pooled Employer Plans” in the US, Europe’s PEPPs don’t require sponsorship or supervision by an employer, and don’t use an employer’s payroll system. Instead, each participant chooses a PEPP provider and contributes to their account on their own.

Banks, insurance companies, and asset managers can offer PEPPs. They must register their offerings with a central registry at the European Insurance and Occupational Pension Association (EIOPA), and agree to maximum 1% annual investment fees. Annuities may entail additional fees. Participants can switch providers, but only once every five years.

Europe’s retirement regulations are just now catching up with European labor trends. “In 2015, 11.3 million Union citizens of working age (20 to 64 years old) were residing in a Member State other than the Member State of their citizenship and 1.3 million Union citizens were working in a Member State other than their Member State of residence,” according to a July 2019 article in the Official Journal of the European Union. About 447 million people live in the EU.

“[EU] households are amongst the highest savers in the world, but the bulk of those savings are held in bank accounts with short maturities,” the Journal added. “More investment into capital markets can help meet the challenges posed by population aging and low interest rates.”

PEPPs can be offered by credit institutions, direct life insurance companies, institutions for occupational retirement provision (IORPs, which are authorized and supervised to provide also personal pension products), investment firms, asset managers, and EU alternative investment fund managers.

But there was a sign this week that insurance companies, for one industry category, may choose not to implement PEPPs. Hugh Prenn of the Capital Markets division of UNIQA Group, a major insurer in central and eastern Europe, who appeared in a webinar introducing PEPP this week, told RIJ that “There will be no PEPP from our side.”

He added, “I guess my opinion is representative for many if not all insurance companies.” Asked why he was on the webinar, he said, “Because I have been a member of the expert panel at EIOPA.” On EIOPA’s registry, no PEPP offerings are listed. Prenn noted an industry study showing that the consumer protections required on PEPPs will make it difficult to offer a product. [Note: We will update this story as more information becomes available.]

“Certainly higher interest rates could help us to become more interested,” Prenn said in the webinar. “That would make complying with these rules much easier. We would need benchmark rates of about 2%, and we are halfway there.” Without more yield, he noted, it would be impossible for an insurance company to meet the PEPP’s specific requirements for minimum returns and maximum losses.

He also expressed concern about potential legal liabilities. “How will a civil court see this regulation? In a negative market scenario, we will have unhappy customers pursuing us with skillful lawyers. This creates legal risks that will have to be covered by the 1% return on this product.”

European investors are famously averse to market risk. So a capital preservation feature was added to the default version of PEPP (Basic PEPP). “For the Basic PEPP with a guarantee, PEPP savers will have a legal obligation to ensure that PEPP savers recoup at least the capital invested. The guarantee on the capital shall be due only at the start of the decumulation phase and during the decumulation phase,” according to a PEPP fact sheet. Such guarantees will be difficult for providers to offer when yields are low.

In an aging, low birth-rate Europe, where a declining worker-to-beneficiary ratio is putting pressure on social insurance programs with tax-based, pay-as-you-go funding mechanisms, governments want to encourage individuals to save more on their own. European workers face many of the same retirement challenges that Americans do—insufficient savings, incomplete access to savings plans, and unconventional careers.

Contributions to PEPP funds could also help the investment industry in Europe. Europeans traditionally save at banks, and PEPPs could draw savings toward capital markets investments in exchange-listed companies. A larger market could also give PEPP providers greater efficiencies and economies of scale.

The idea for Europe’s PEPPs was hatched in July 2012 when the European Commission, eager for individual savers to shoulder more of their own pension burden, asked EIOPA to gather information on a personal, private pension option for EU workers. The project advanced slowly through the European bureaucracy until, in 2020, a package of new regulations and services was submitted for the European Commission’s approval.

RIJ submitted the following questions to the EIOPA this week and received the following answers:

Q. How do PEPP participants make contributions, especially if contributions aren’t facilitated by employer payroll mechanisms?

A. The PEPP is a pillar three product. It is separate from the state pensions and the occupational pensions. Savers make contributions on their own without facilitation by payrolls.

Q. Is there any limit to the number of companies that can offer plans?

A. No. Eligible providers are credit institutions, insurers, institutions for occupational retirement provisions as well as investment or management companies. Each provider can offer as many PEPPs as they want. There is a limit on the number of investment options. Providers can offer basic PEPP and six other investment options.

Q. How are plans distributed and payments made? Purely online? Is there an emphasis on smartphones?

A. It is not prescribed to use online distribution only. However, the PEPP Regulation aims to put ‘digital first’ and allows a fully digital disclosure and distribution. Digital disclosure may include more engaging forms of media (such as video) or interactive elements which makes it more appealing and easier to understand for consumers.

PEPP providers and distributors are obliged to give advice. The PEPP Regulation, in addition to traditional advice, allows either fully automated or semi-automated advice. Content of the pre(contractual) information to consumers has to be presented in a way that is adapted to the PEPP saver’s device used for accessing the document. Font size, size of the different elements should be adjusted depending on the device being used for accessing the information.

Q. Is there any limit to the kinds of savings vehicles—such as annuities, mutual funds, collective investment trusts—that PEPPs can offer?

A. Providers can offer different forms of out-payments, which can be modified by savers free of charge one year before the start of the decumulation phase, at the start of the decumulation phase and at the moment of switching providers. The forms of retirement income can be an annuity and life-long pay-out, a lump sum payment, drawn down payments or a combination of the aforementioned.

Q. How is the conversion to decumulation handled?

A. PEPP providers should inform PEPP savers two months before the dates on which PEPP savers have the possibility to modify their pay-out options about the upcoming start of the decumulation phase, the possible forms of out-payments and the possibility to modify the form of out-payments. Where more than one sub-account has been opened, PEPP savers should be informed about the possible start of the decumulation phase of each sub-account.

National competent authorities are required to publish national laws, regulations and administrative provisions governing the conditions related to the decumulation phase. These also are published on our website.

Tuesday’s webinar panelists included Til Klein, founder of Vantik, which puts credit card rewards into a personal pension, Christian Lemaire of the Occupational Pensions Stakeholder Group, Hugo Prenn of Uniqa Insurance, Tim Shakesby of EIOPA, and Peter Ohrlander, Directorate General for Financial Stability, Financial Services and Capital Markets Union at the European Commission.

MetLife launches ‘private equity fund’ platform

Inflation, war affect asset allocations at pension funds: bfinance

Eagle Life enhances index annuities

Elizabeth Heffernan joins Micruity

US among countries with lowest fund fees: Morningstar

Old-age poverty scarier than death for the unretired: Allianz Life

American Funds and Morningstar partner for ‘Target Date Plus’

Prudential’s PRIAC life company upgraded by AM Best

CVS sells PayFlex to Millennium Trust

The Standard offers ESG indexed annuity

Annexus and State Street partner on TDF with income rider

SEC seeks more SPAC disclosure

RetireOne hires McNeela and Cusack

SEC aims to regulate securities dealers, market makers

‘Thematic Funds’ database available to Morningstar clients

Personalized SMAs: A new product class

Data Connection

Lists*