Archives: Articles

IssueM Articles

AIG indexed annuities to offer PIMCO custom index

Posted on November 9, 2017 by Editorial Staff -

American International Group, Inc., will offer the new PIMCO Global Optima Index for its Power Series of fixed index annuities (FIAs), which are issued by AIG subsidiaries American General Life Insurance Company (AGL) and the Variable Annuity Life Insurance Company (VALIC).

At mid-year 2017, AIG was the second leading seller of fixed annuities ($4.05 billion, including fixed rate and indexed), the third leading seller of individual variable annuities ($3.38 billion) and the third-leading overall seller of annuities ($7.39 billion) after Jackson National and New York Life.

The PIMCO Global Optima Index uses quantitative rules to adjust its allocations among U.S. equities, international equities, and U.S. fixed income assets, according to a release. Equity weightings are rebalanced monthly using a “smart beta” approach. Within a particular market size or capitalization level, it looks for “momentum” sectors where asset prices are rising or “value” sectors where assets appear underpriced. Allocations between equities and fixed income are adjusted daily for risk management.

The new index also appears to offer, for the purpose of risk-reduction, something akin to constant proportion portfolio insurance, according to a press release this week. With this method, generally, the manager of a balanced fund with a downside guarantee would shift out of equities and into bonds when equity prices fall, and do the opposite when equity prices rise.

This technique enables the shift the holdings entirely to safe assets (bonds and/or cash) before the overall value of the product’s assets falls below the level needed to meet the guarantee. If it fell below that point, the issuer would have to make up the difference, possibly losing money on the product. Issuers can use this type of safety technique to offer an “uncapped” crediting rate—which some investors prefer in an FIA—that has no apparent upper limit on client gains.

“The Index aims for a high equity allocation in up markets and has the ability to allocate up to 100% equities. In down markets, allocations can be quickly shifted to fixed income to help reduce risk. Cash may also be used in times of extreme market volatility,” an AIG press release said.

Jackson issues new IOVA for private wealth and trust market

Posted on November 9, 2017 by Editorial Staff -

Jackson National Life has entered the trust space by creating a Private Wealth & Trust group and by launching Private Wealth Shield, an investment-only, tax-deferred variable annuity that trusts and private banks can offer their wealthiest clients.

The new “institutionally-priced” annuity will be available commission-free for fee-based advisors and without surrender charges, according to a Jackson release. The contract offers no living benefit rider, but can be annuitized on a fixed or variable basis. The prospectus can be found here.

Jackson is the biggest seller of variable annuities in the U.S., with sales of almost $9 billion in the first half of 2017. The firm’s Perspective II (7-year) contract is the top-selling individual VA and its Elite Access investment-only VA is among the contracts with the highest sales.

Current expenses include a core contract charge of 35 basis points per year (30 bps for contracts over $1 million), a return-of-premium death benefit for 25 bps (maximum: 50 bps), and investment fees of 26 bps to 205 bps per year, depending on the investment options chosen. Contract fees have a maximum of 85 bps per year, according to the prospectus.

The new contract can be used to help wealthy individuals and families access tax-sheltered investments, lower taxes and create multi-generation portfolios, Jackson said. For irrevocable trusts, Private Wealth Shield removes the need for tax-related distributions, keeping more assets in the trust.

“Many of these entities haven’t traditionally utilized annuities in their practices,” said Justin Fitzpatrick, head of Private Wealth & Trust at Jackson National Life Distributors LLC (JNLD), in the release. “We’re hoping to change that.”

“Private trustees have long relied on tax-deferred annuities, but Private Wealth Shield’s investment-only platform offers trust and private wealth firms a more powerful solution for mitigating taxes on nonqualified assets, particularly within the high-net-worth market,” said John Poulsen, executive vice president of sales strategy at JNLD.

“As financial institutions and professionals navigate complicated fiduciary rules that can lead to difficult investment and tax management decisions, Private Wealth Shield presents a viable strategy that can help alleviate these challenges to meet the needs of their clients.”

Honorable Mention

Posted on November 9, 2017 by Editorial Staff -

Nationwide offers ETFs with a French flavor

Nationwide has entered the exchange-traded fund (ETF) market with the launch of three “strategic beta” ETFs: The Nationwide Maximum Diversification U.S. Core Equity ETF, the Nationwide Risk-Based U.S. Equity ETF, and the Nationwide Risk-Based International Equity ETF.

Through these products, U.S. retail investors will have access through an ETF structure to proprietary indexes developed by TOBAM and Rothschild Risk Based Investments LLC (“Rothschild”), Nationwide said in a release.

The Nationwide Maximum Diversification U.S. Core Equity ETF (MXDU) tracks an index developed by TOBAM that picks investments using liquidity and socially responsible investment (SRI) screens. The patented, proprietary TOBAM Diversification Ratio allows TOBAM to weight individual stocks to minimize the correlations among holdings.

The Nationwide Risk-Based U.S. Equity ETF (RBUS) and the Nationwide Risk-Based International Equity ETF (RBIN) track indexes developed by Rothschild Risk Based Investments LLC and “seek to reduce portfolio volatility, mitigate severe drawdowns and enhance the Sharpe ratio, all without curtailing returns,” the release said.

Rothschild determines the level of risk corresponding to each security and eliminates the riskiest 50% of the stocks in the universe from the index. The remaining stocks are weighted according to their volatilities and correlations, so that each constituent contributes the same amount of risk to the overall portfolio, Nationwide said.

Nationwide currently manages 115 funds with approximately $65 billion in assets, excluding fund of funds.

Principal and NCR ink pension risk transfer deal

In a pension risk transfer deal, NCR Corporation has agreed to buy a single premium group annuity contract from Principal Life Insurance Company to provide about $190 million of benefits for some 6,000 former employees or their related beneficiaries whose monthly pension benefit amount under NCR’s defined benefit plan as of January 1, 2017 was $500 or less.

NCR expects the annuity to be issued by Principal Life Insurance Company in 2018. “Because this contract was purchased with existing Plan assets, no additional funding of the Plan was required for this purchase,” said John Boudreau, NCR Treasurer, in a press release. Any impact of the purchase on NCR’s financial statements will be included in the year-end 2017 mark-to-market adjustment, NCR said in the release. According to the release:

The amount of the future monthly benefit payment for each of these individuals under this group annuity contract will equal the amount of such individual’s monthly benefit payable under the terms of the Plan. Additionally, this group annuity contract provides the same rights to future payments, such as survivor benefits, that are currently provided under the terms of the Plan. No action is required by affected former employees or their related beneficiaries at this time in order to receive such benefits. The December 2017 letters will contain further information.

This group annuity contract has no bearing on active employees, former employees or their related beneficiaries who have not commenced monthly benefits under the Plan as of January 1, 2017, or former employees or their related beneficiaries whose monthly benefit amount under the Plan as of January 1, 2017 exceeded $500.

Rising stock prices boost 401(k) account balances: Fidelity

Fidelity Investments today released its quarterly analysis of 401(k) and individual retirement accounts (IRA). According to the analysis:

Retirement account balances reached all-time highs for the fourth consecutive quarter. Helped by strong stock market performance, the average 401(k) and IRA balances increased 10% over the last year and continued to hit record levels. The average 401(k) balance rose to $99,900, while the average IRA balance climbed to $103,500.

The average 401(k) and IRA balance increased for every generation (Boomers, Gen X and Millennials) over the last year. The average IRA balance for Gen X investors increased 16.5% to $51,500, and the average Gen X 401(k) balance increased 18% to $98,800.

Individuals are contributing more to their retirement accounts. The average 401(k) contribution rate reached 8.5% in Q3, the highest percentage in almost 10 years, and 29% of savers increased their contribution rate over the last year. The amount contributed to IRAs year-to-date increased 12%; Roth IRA contributions alone increased by 13%.

Fidelity’s Roth IRA for Kids reached 10,000 accounts. Demonstrating it’s never too early to start saving for retirement, Fidelity’s Roth IRA for Kids, launched in 2016, has generated significant interest with now more than 10,000 accounts. The product allows an adult custodian to contribute the equivalent of the child’s yearly income to the account.

An increasing percentage of workers are using target date funds for 401(k) savings. As of the end of Q3, 29% of all Fidelity 401(k) assets were held in target date funds, up from 18% at the end of Q3 2012. Almost half of all workers (48%) hold all of their 401(k) savings in a target date fund, up from 30% in 2012.4

Workers with both an HSA and 401(k) contribute more than workers with just a 401(k). Fidelity analysis indicates that workers who contribute to both their HSA and their 401(k) contributed an average of 9.9% at the end of Q3, compared to 8.5% for individuals who only contribute to their 401(k). The number of HSA account holders on Fidelity’s platform increased 35% over the last year.

RetireUp Turns Pro

Posted on November 2, 2017 by Kerry Pechter -

With last month’s introduction of RetireUp Pro, the latest iteration of the popular RetireUp income planning software, the broker-dealer world got a chance to see what the five-year-old fintech company did with its equity infusion from Annexus Ventures last year.

RetireUp Pro appears to be broader, deeper, and more tilted toward selling fixed indexed annuities (FIAs) than “classic” RetireUp. Where the original software focused on income planning, the newest version is designed to maximize efficiency, help advisors meet DOL fiduciary standards and drive more insurance product transactions.

It does that by upgrading the original RetireUp and merging it with RepPro, a platform that provides the pre-filled forms that advisors and producers need for “straight-through-processing of annuity purchases. The resulting “end to end” solution spans the advice-and-sales process, squeezing out time-wasters, guard-railing potential fiduciary violations and scrubbing out the typos that generate NIGO (not in good order) rejections from carriers.

RetireUp Pro is designed to bridge many worlds: human and robo-advice, the investment and insurance product silos, the accumulation and decumulation planning stages, the advice process and the sales process, and the front-office and middle-office. It’s a tall order, but, then, that’s what the times demand.

The most intriguing aspect of this story, for retirement industry watchers, may be the role of Annexus, the Arizona-based indexed annuity design and distribution firm. Annexus is already the “Intel Inside” for leading indexed insurance products and oversees distribution of indexed insurance products. With RetireUp Pro, it now has its own “end to end” play in the annuity marketplace.

A bit of history

Since Annexus Ventures bought into RetireUp in December 2016 with a reported eight-figure investment, the firm’s original product has changed considerably. The original RetireUp was created in 2012 and led by a bootstrapped, Chicago-area group of entrepreneurs that included co-founder Dan Santner, a songwriter-software architect, Michael Roth, a young derivatives trader, and operations chief Brian Bossler.

RetireUp focused on retirement income planning, not the accumulation stage leading up to retirement or the post-planning annuity sales process. “We saw a missing niche,” Roth (right) told RIJ recently. “Advisors were saying to clients, ‘Here’s the annual return of this model or this model,’ but for clients the fundamental question was, ‘Will I outlive my income?’”

A core innovation of the original RetireUp lives on in RetireUp Pro: A screen-view where users see a round (virtual) dial with a number in the middle and a green edge partially encircling the rim. The number indicates the percentage of a retiree’s income that will come from guaranteed sources like Social Security, pensions and annuities (especially variable annuities, when VAs still dominated annuity brokerage sales). When the percentage is zero, no green can be seen. When the number reaches 100%, a bright green circle surrounds it. RetireUp calls the feature an “Income Stability Ratio.”

“On the old system, income stability was the focus of the plan,” Roth said. “That’s what we decided to emphasize.” Investment-oriented software, by contrast, emphasized the Monte Carlo-based probability that, given a specific asset allocation, a clients’ money would last as long as they lived. “RetireUp was born out of that [feature]. We made it prominent on purpose.”

In early 2016, some RetireUp users asked if a sales component could be added to the product. Those requests became more urgent as the June 9 enactment of the Department of Labor’s fiduciary rule approached. The rule requires advisors who want to sell indexed or variable annuities on commission to provide evidence—an audit trail—that their sales recommendations to IRA clients were in the client’s “best interest.”

“About 18 months ago, people started asking, ‘Can we stay on the same platform and go into sales mode?’” Roth said. “And then DOL happened. The regulation has galvanized us and motivated us to act faster. By then the writing was on the wall that we’re in an increasingly regulated environment.” RetireUp also adapted to the changing annuity market by preloading data on Great American and Allianz Life FIAs.

Annexation

By then, RetireUp had been noticed by Scottsdale, AZ-based Annexus Ventures, a fin-tech incubator fund. Among its backers are Ron Shurts and Don Dady, who started Annexus in 2006. Annexus was a designer of the algorithms in FIAs such as the Nationwide New Heights and Athene BCA Elevate and others. Annexus also distributes indexed insurance products through 19 insurance marketing organizations.

Annexus and Annexus Ventures are closely tied. Jim Richards, chief strategy officer of Annexus and managing partner of Annexus Ventures, is on the board of both RetireUp and RepPro. He told RIJ that Annexus looked at RetireUp and a digital forms and order-entry provider, RepPro, and saw synergies.

“We funded RepPro, which does straight-through processing, and we backed RetireUp, a well-established and respected income planning tool,” Richards (left) said. “In light of the DOL rule, we saw the sense of merging the two. Now we can capture the ‘what if’ scenarios, and get all the data automatically into a data archive package.

“At the same time we built out a risk assessment and brought in portfolio models. We can show them how they are allocated today and where they fall in terms of their risk profile. From there, we can suggest alternative assets such as FIAs and REITs.

“We also built a supervisory platform—that’s the other piece. The financial institution gets to review all of the key components of their advisors’ plans. We roll up all of the data into a dashboard. It goes into a supervisory review queue either at that institution or the custodian or the insurance carrier,” Richards told RIJ.

Starting in early 2017, VALIC began white-labeling a customized version of RetireUp for about a thousand annuity producers, reportedly with great effect, and work continued on the new design. RetireUp Pro appears to be built primarily for annuity sales, especially indexed annuity sales.

Richards noted that IMOs now get more than half of their FIA sales order through registered reps, a target market for the software. Given the strengths and history of Annexus, the investment in RetireUp and RepPro certainly looks like an attempt to vertically integrate the manufacture and distribution of indexed annuities and capitalize their growing use by advisors at brokerages or hybrid RIAs.

Roth and Richards like to emphasize a broader strategy. “The mission of company is to be agnostic to the product type,” Richards said. “We’re seeing the emergence of new types of product classes in the annuity space. We see product development in the fee-based space. We’re seeing further development of indexed variable annuities. I would expect to see SPIAs on the platform in the future.” (Where RetireUp focused on modeling FIAs with income riders, RetireUp Pro models accumulation-only FIAs as well.)

‘The money will follow’

RetireUp Pro costs $149 a month or $999 a year at the individual level, according to the RetireUp website. The per-user cost for enterprises would be much lower. The product features are listed as: Demo Walkthrough, Create Presentations, Income Stability Ratio, CRM Integrations, Income Planning, Accumulation Planning, Fact Finder, Risk Value, Generate Forms, and Multiple-User Syncing and Roles Permissions.

RetireUp Pro is clearly designed to squeeze as much of the inefficiency out of the retirement planning and annuity sales process as possible. Downward pressure on fees means that advisors need tools that can help them handle more clients, reduce the time they have to spend with each client, and maximize their productivity.

More than 50 independent broker-dealers and some 3,000 advisors are currently using RetireUp. Data on FIAs, including both fee-based and commission-based products, from Allianz Life, American Equity, Athene, Global Atlantic, and Great American are now or will be pre-loaded on the platform, with more to come.

Barring the possibility that Boomers will use pure robo-advice for do-it-yourself retirement planning and annuity purchases, RetireUp Pro represents something close to the future of successful, DOL-compliant hybrid digital advice that involves both humans and algorithms. Its tilt toward indexed products makes it less than truly agnostic, but agnosticism is a luxury enjoyed mainly by pure planners, not broker-dealer advisors.

Nonetheless, it’s a step forward from the days when clients didn’t get to participate much in the income-planning or product-selection process at all. “If we build trust and transparency, the money will follow,” Roth told RIJ. “You have about one third of advisors who are successful, and you have a bottom third who don’t have any process at all. They aren’t adding value to client. Then you have what I call the motivated middle. We want to help them add value, and efficiency and help get them to the top third.”

America’s Tax-Cut Peronists

Posted on November 2, 2017 by Simon Johnson -

Name the country. Its leader rails against foreigners, erects various import barriers, and pushes for low interest rates and lots of cheap credit for favored sectors. Government debt is already high, but the would-be strongman in power decides to pile on even more by increasing the budget deficit, arguing that this will boost prosperity to previously unattainable levels. While the government claims to represent the common people, state contracts are awarded to friends of friends.

The answer, of course, is Argentina under Juan Perón, who was in power from 1946 to 1955 (and again briefly in 1973 and 1974), and many of his successors. One of the richest countries in the world around 1900 was laid low by decades of unsustainable economic policies that made people feel good in the short run but eventually ended in disaster, such as runaway inflation, financial crisis, and periodic debt defaults. (To be clear, Argentina’s economic policies today are quite different; for deep and up-to-date analysis, I recommend the work of my colleague Alberto Cavallo.)

But if your answer was the United States under President Donald Trump, you would not be far off. There is reason to fear that the US is now on the path to what was previously known as Latin American populism.

Consider the remarkable volte-face of the Republican Party on fiscal responsibility. There used to be a national debt clock in the hearing room of the House Financial Services Committee, and Republicans would rant about government profligacy as it ticked upward. When I was in that room recently, the clock was “under repair.”

Self-proclaimed “fiscal conservatives,” such as Mick Mulvaney (a former member of the House of Representatives who now runs government finances as head of the Office of Management and Budget), are close to enacting a massive tax cut, despite knowing that it will drive up the deficit and the national debt. Mulvaney and his colleagues could not care less.

Despite controlling both Houses of Congress and the presidency, the Republicans are beset by internal divisions. As a result, they are finding it hard to “pay for” the tax cuts with any reduction in tax expenditures (incentives for various activities such as corporate borrowing, mortgage financing, or retirement saving). But Republicans are deeply committed to gigantic tax cuts, in large part because their donors are demanding that they enact them. As a result, the US will merely end up with bigger budget deficits.

Facts used to matter in Washington, at least a little bit. But this is no longer the case in the age of Trump, at least not when it comes to taxes. Instead, the strategy has been to state, in a bald-faced manner whatever one wants to believe and heap ill-mannered abuse on anyone who cites evidence to the contrary.

In Chapter 3 of White House Burning, James Kwak and I reviewed what happened after the tax cuts enacted in 2001 under George W. Bush. Great promises were made about the cuts, including that they would help most Americans. But while they did help rich people become richer, there is no evidence that they delivered faster growth or higher incomes for the middle class. Instead, they boosted the budget deficit and contributed significantly to increasing the US national debt (by around $3 trillion through 2010), which weakened the government’s ability to respond to crises, either in terms of national security or financial instability.

I have testified repeatedly before Congress on matters of fiscal policy. During the financial crisis of 2008-2009, Republicans were certainly interested in the facts. But this quickly tapered off, most notably in the House of Representatives. In fact, Kevin Brady, the representative who told me most clearly that he was not interested in looking at even moderately inconvenient facts, is now Chair of the House Ways and Means Committee, which plays a key role in what happens with taxes.

Ron Wyden, the senior Democrat on the Senate Finance Committee, calls the proposed Republican tax cuts “a middle-class con job.” He is being polite.

The cut in corporate taxes that the Republicans are likely to support will not boost wages significantly. As the Congressional Research Service, describing the broader blueprint put forward by House Speaker Paul Ryan, has put it, “the plan’s estimated output effects appear to be limited in size and possibly negative.”

Including all possible positive effects of the Republican proposals, the Tax Policy Center has concluded that federal government “revenue would fall by between $2.4 trillion and $2.5 trillion over the first ten years and by about $3.4 trillion over the second decade.”

The Trump administration has responded to this type of sensible, fact-based analysis in the way one has come to expect: by being rude.

American populism in the Trump era, though promising great gains for working people, will in fact benefit only those who are already rich. To be fair, this is quite a twist on anything Perón could have imagined pulling off. The results of irresponsible populism, however, are always the same.

DC Plans: Can Everyone Win?

Posted on November 2, 2017 by Jack Towarnicky -

Many point to the increased use of DC plans triggering a “Retirement Crisis.” We can confirm that:

If America has a crisis, it is less than the one we faced just two generations ago – where fewer had employer-sponsored plans, savings were modest and “invested” in passbook savings accounts at local banks or S&Ls, work was much more physical/blue collar, and only a few workers could afford to retire before they were physically unable to continue working,

Millions of Americans are successfully saving and preparing for retirement,

As a nation, after the Pension Protection Act of 2006, we are making great strides for those workers whose employer offers a plan, however,

The retirement paradigm keeps changing. In the past we might seek to finance 15 or so years in retirement whereas today, babies born in developed countries may well live, on average, to see their 100th birthday.

We need to define terms. Most benefits professionals would define a “win” as financial preparation and decision-making skills sufficient to maintain a pre-retirement standard of living. “Everyone” doesn’t include “everyone.” Many of us would exclude those workers who die prematurely or suffer a work-ending disability. Others might define “win” to include a second career, phased retirement, or sacrificing some income for increased periods of leisure.

So, can “everyone” win in the DC system? Yes, we think potentially as much as in a DB system! That’s particularly true when one considers that we failed to adequately fund our DB promises – the unfunded liability for private and public employer plans, income replacement, and retiree medical totals trillions of dollars! I like to say, “Pension promises without funding are mere dreams.”

Whether DB or DC, unless we fund our Social Security and Medicare promises, retirement preparation will become that much more elusive to America’s wage earners. Assuming we meet our commitments, there are a number of savings opportunities, tax preferences, investment, and payout choices. But that only works if workers consider retirement preparation a priority and take action to save.

And, “can” does not equal “will.” That’s true for DC or DB. The barriers are numerous: debts, bad financial decisions, lack of prioritization, financial illiteracy, etc. But “can” is correct. Every wage owner has had access to a tax-favored retirement savings account since 1982 – the Individual Retirement Account. That’s 35 years.

So, if we have a “retirement crisis,” it may well be one of funding entitlements, maintaining existing tax preferences, and a lack of personal prioritization when it comes to saving.

Trump expected to name Powell as Fed chair today

Posted on November 2, 2017 by Editorial Staff -

President Donald Trump will announce his intention to nominate Jerome “Jay” Powell as the next chair of the Federal Reserve at 3 p.m. today, as successor to Janet Yellen, whose term expires in February, several news outlets reported last night.

Powell, an attorney, joined the central bank’s board of governors in 2012 under President Barack Obama and was renominated in 2014. He is not expected to deviate heavily from Ms. Yellen’s gradual approach to raising interest rates.

The top choice of Treasury Secretary Steven Mnuchin, Powell was not the first choice of conservatives on Capitol Hill and inside the administration, who argued in favor of other candidates including former Fed Gov. Kevin Warsh and Stanford economist John Taylor.

Taylor was reportedly seen by officials in the Treasury Department as potentially too likely to hike rates, which could diminish the stimulative impact of tax cuts. Powell received a handful of “no” votes from Republicans during his initial confirmation to the Fed, but he is expected to win confirmation easily.

The 80/20 rule (more or less) applies to Registered Investment Advisors

Posted on November 2, 2017 by Editorial Staff -

The 687 retail-focused advisory firms with $1 billion or more under management comprise less than four percent of such firm but control about 60% of retail assets under management, valued at $2.4 trillion, according to global research and consulting firm Cerulli Associates.

“Billion-dollar RIAs make up only 3.8% of all retail-focused firms. The clear majority of RIAs are much smaller, with less than $100 million in AUM,” said Marina Shtyrkov, a research analyst at Cerulli, in a release.

M&A helps explain it. “Since 2012, billion-dollar RIA firms have steadily accumulated asset marketshare by attracting big teams from other channels and engaging in a significant amount of merger and acquisition (M&A) activity,” the release said. “RIAs of all sizes are choosing to merge for a number of reasons: depth of specialization, succession, and growth through economies of scale.”

Cerulli finds that the largest RIAs that have already amassed billions of dollars in AUM are increasingly merging to expand their talent, strengthen their intellectual capital, and create super-regional firms.

“Some of the largest RIAs resemble small broker/dealers (B/Ds) in size, service, and brand awareness among advisors,” said Kenton Shirk, director of Cerulli’s intermediary practice, in a statement. “Their ability to lure breakaway advisors should be a concern for B/Ds. Half of breakaway advisors prefer to join an established independent practice. Billion-dollar RIAs are becoming formidable competitors for B/Ds.”

Cerulli’s latest report, U.S. RIA Marketplace 2017: Ascendance of the Billion-Dollar Firm, offers an analysis of the dynamics of the RIA channel, including market sizing, advisor attributes, custodian and asset manager relationships, investment decisions and product use, practice operations and growth strategies.

New Morningstar tool supports “best interest” rollover recommendations

Posted on November 2, 2017 by Editorial Staff -

Morningstar, Inc., the investment research firm, has launched the Morningstar Best Interest Scorecard, a tool designed to help financial advisors recommend rollovers to plan participants without violating any fiduciary standard. The Best Interest Scorecard enables advisors to assess:

The client’s current investment plan
Changes the client could make within their current plan
The new portfolio and service offering that the advisor is proposing for the client through a rollover or other process

Using the tool, advisors can then determine, demonstrate, and document whether their proposal is in the investor’s best interest according to the proposal’s:

Investment value: The expected returns and costs of 97.5% of US mutual fund and ETF assets, according to Morningstar’s ratings and methodology.
Client fit: Overall efficiency of the asset allocation relative to Morningstar Target Risk Indexes and the ability of the plans to deliver portfolios that match the clients’ risk profiles.
Service value: The net benefit to each client of financial planning services the advisor provides, such as life insurance advice, estate planning, behavioral coaching, rebalancing and annuity purchase decisions.

The Best Interest Scorecard also allows advisors to capture other client factors, such as appreciated employer securities, financial health of the investor and employer, or desire to work with an advisor, without weighing these factors explicitly in scores.

NAFA partners with message encryption provider

Posted on November 2, 2017 by Editorial Staff -

NAFA, the National Association for Fixed Annuities, which lobbies on behalf of the fixed indexed annuity industry, said this week that it would partner with VeriFyle, a supplier of secure messaging and file sharing technology, and the use the software for “as many as 200,000 NAFA constituents.”

“Our members and their clients should have access to a private and secure channel for sharing documents and sending messages,” said Chip Anderson, executive director of NAFA, in a release.

Instead of using a single master key for encrypting and decrypting their users’ data, VeriFyle’s uses password-derived keys on top of a public-key system to individually encrypt data objects. With the additional option to disable password reset, VeriFyle claims to be the most secure cloud-sharing platform available.

VeriFyle delivers messaging and document sharing from a simple, single-screen interface. Its patented encryption technology is designed to protect users from bulk-access vulnerability through the unique encryption of each individual document and message thread.

Ownership of Financial Assets by U.S. Families (2013 vs. 2016)

Posted on October 26, 2017 by Editor Test -

Source: “Changes in U.S. Family Finances from 2013 to 2016, Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, September 2017, Vol. 103 No. 3.

Trick or Tweet

Posted on October 26, 2017 by Kerry Pechter -

It was the tweet heard ‘round the retirement world, and beyond. At 7:34 a.m. last Monday, President Trump typed on his smartphone keypad: “There will be NO change to your 401(k). This has always been a great and popular middle class tax break that works, and it stays!”

Wisely, retirement industry-watchers waited for Trump’s other custom-made shoe to drop. It did. Yesterday, House Ways and Means Committee chairman Kevin Brady said that elements of the 401(k) program might still serve as bargaining chips in tax bill negotiations. The President agreed, telling reporters, “Maybe we’ll use that.”

But let’s return to Monday, and to Gaylord National Harbor Convention Center, just south of the Capitol. Brian Graff, CEO of the American Retirement Association (ARA), held his own press conference at the 2017 meeting of the American Society of Pension Professionals & Actuaries (ASPPA), a part of ARA. ARA lobbies for the advisors and third-party administrators (TPAs) who serve 600,000+ small and mid-sized 401(k) plans.

Graff felt a bit, in a staff member’s words, “punchy” due to the labile status of Republican tax legislation and its impact on tax incentives for retirement savings. He knows that there is no policy—only a scavenger hunt for revenue to “pay for” still-undefined tax cuts. Reducing the tax break for contributions to 401(k)s may be one of those pay-fors.

“This is crazy time,” Graff mused, as much to himself as to the two reporters present. He began to describe a possible timetable for the passage of a Republican tax bill before the fast-approaching end of the current legislative session, and then gave up. “But I’m talking logically, and logic doesn’t hold now,” he concluded.

The uncertainty about tax reform, and Congress’ apparent disinterest in 401(k)s except as a kind of piñata, lent a daffy, fatalistic tension to many of us at the Convention Center, where not just ASPPA but also LIMRA, which conducts market research for the life/annuity industry, was holding its annual conference.

Nonetheless, both conferences offered a number of informative panel discussions, keynote presentations, and break-out sessions on topics that included direct online sales of deferred income annuities, the conflict between low-tax pass-through businesses and tax incentives to sponsor micro 401(k) plans, and the reputational risk that may or may not be associated sales of indexed annuities.

Selling DIAs direct

Over the past year or so, Nationwide has been running a pilot program in Arizona to test the feasibility of marketing and fulfilling the sale of deferred income annuities entirely online. In a session called “Innovative Product Design” at the LIMRA conference, Nationwide’s Eric Henderson, senior vice president for life insurance and annuities, and Jean Finnegan, assistant vice president, product design, shared lessons learned.

“Offering DIAs in a low interest environment was a challenge. We faced a lot of ‘no’s’ at the beginning,” Finnegan said. “People said, ‘No one will buy this product online, no regulator will approve, our systems will have to support the product forever, you can’t do suitability assessments online.’

One by one, Nationwide overcame those hurdles, she said, but capturing prospects, educating them and getting them to sign a contract remains difficult. “We have five million brand impressions and 7,000 people coming to our educational landing page. So we have no trouble filling the top of the funnel. But we discovered that it’s hard to drive people to the bottom of the funnel.”

Finnegan and Henderson leveraged some of the direct online sales experience of Nationwide’s property and casualty business in setting up an online DIA business, but they learned that they needed help from small tech companies for mobile applications and chatbots.

There was a culture clash: Tech firms operate at warp speed while big insurance companies operate at tortoise speed. Ten-person tech firms don’t have Chief Risk Officers on staff. In the month that it takes a big insurer to coordinate executive schedules and convene a preliminary meeting, a tech start-up can burn through hundreds of thousands of dollars of venture capital.

Interestingly, Finnegan noted that Nationwide has lowered one behavioral barrier to DIA sales by making its contracts revocable, with haircut.

The ‘pass-through’ problem

Lawyers at the American Retirement Association, which lobbies for service providers to the vast numbers of small and micro 401(k) plans, are hoping to defuse the threat that a tax bill might reduce the tax rate on so-called “pass-through” business entities to 25%.

If that happens, as it did in Kansas, many small proprietors who currently pay ordinary income tax at much higher marginal rates might convert their companies to pass-through. If they lower their taxes that way, they won’t need the tax break that they get from sponsoring 401(k) plans. Observers disagree on how likely a pass-through plank would be included a new tax bill.

CEOs debate FIAs

In a lively panel discussion among four CEOs, Ted Mathas of New York Life, Tom Marra of Symetra Financial, Bob Reynolds of Great-West Financial, and Bob Kerzner of LIMRA, discussed fixed indexed annuities (FIAs). Marra and Reynolds defended the product; Mathas explained why his company doesn’t sell it.

“There’s nothing inherently wrong with the product,” Mathas said. “The manager buys mostly zero coupon bonds and takes some of the remaining money and buys some equity options. Structurally, there’s nothing wrong with it.

“The question is, ‘What are people hearing at the point of sale? What are their expectations, and will the product meet their expectations over the long term? The distributor is selling an illustration that shows a 7.5% return, but most people don’t understand the trade-off,” he said.

“If you cap all of the best years, you won’t be able to make up for the down years. Your chance of a 7.5% return over 30 years is in the single digits. So there’s the reputational risk of not living up to expectations. If we came out with a product that illustrated [a more realistic] 5% return, people would say, ‘Why is yours so low?’”

With “Ascend,” Voya Enters the Structured Variable Annuity Race

Posted on October 26, 2017 by Kerry Pechter -

Just as tablet computers occupy a niche mid-way between smartphones and laptops, indexed variable annuities (aka structured-note annuities) occupy a niche between fixed indexed annuities (FIA) and variable annuities (VA). Introduced in 2011, IVA sales have doubled yearly since 2014 and could reach $9 billion in 2017, according to LIMRA.

Voya Financial will soon jump into this niche with its first-ever IVA contract. The product, whose September 28, 2017, prospectus awaits SEC approval, is called Voya Ascend Annuity. It joins a field of IVAs issued by AXA, MetLife (now Brighthouse), Allianz Life and CUNA Mutual. The commission-based version of Ascend will be available in early 2018, with a fee-based version for registered investment advisors scheduled later in the year, according to Voya.

“It’s a new and improved version of a product that we previously offered called Potential Plus,” said Chad Tope, president of Annuities and Individual Life Distribution for Voya Financial, in an interview this week at the LIMRA annual conference in the Gaylord National Harbor Convention Center near Washington, D.C.

According to SEC documents, Ascend will offer three term options (one-year, three-years and six-years), four index options (S&P 500, Russell 2000, NASDAQ-100 and MSCI-EAFE), and downside “buffers” of 5%, 10%, 20% and 30%. Not every possible combination of duration, index and buffer will be available. (See chart from the prospectus below.)

Voya, which also sells an investment-only variable annuity, FIAs, income annuities and multi-year guaranteed (MYGA) fixed annuities, expects to distribute Ascend primarily through dually-licensed (insurance and securities) bank advisors. (The names of the new IVA, along with the name of the Journey indexed annuity and the Voya brand name itself, are all intended to harmonize around the concept of the investors’ lifetime financial journey.)

AXA’s Structured Capital Strategies had sales of $1.8 billion in the first half of 2017, a distant second to the $6.59 billion in sales of Jackson National’s Perspective II 7-year contract among top-selling individual VA products through June 30 of this year, according to Morningstar. Allianz Life’s Index Advantage sold $831.6 million for 14th place among VA contracts.

Indexed variable annuities resemble fixed indexed annuities, but with weaker downside protections and more generous upside potential. Where an FIA protects against any loss of principal (if held through the surrender period), the owner of a IVA is protected from the first five to 30 percentage points of loss over the term and bears all net loss beyond that point. (CUNA Mutual’s IVA differs; instead of a buffer, it establishes a downside floor to what the client can lose during the term.)

IVAs lack the stigma that indexed annuities acquired during their “wild west days” of 10 to 15 years ago, when exorbitant commissions fueled sales abuses, bad publicity and an unsuccessful attempt by the SEC to regulate them as securities products. It’s noteworthy that AXA, Brighthouse and CUNA Mutual, which have avoided FIAs, have entered the indexed market via IVAs. Allianz Life has been the leader in FIA sales for more than a decade.

Indexed products are to some extent a creature of the low-interest rate periods of the early 2000s and post-financial crisis era. Their hybrid makeup (FIAs are 95% zero-coupon bonds and 5% options on equity indices) renders them richer than certificates of deposit when rates are low and safer than equities when volatility is high.

“These products have never been associated with the dark days of the FIA market,” said Tope. “There’s also a perception that they’ve stayed in a consistent performance range. We’re excited about opening up an advisor base that we’re not attracting today.” After institutional retirement plans, annuities are Voya’s second biggest business, accounting for 29% of earnings as of June 30.

FIAs and IVAs can have caps or participation rates that limit the amount of interest that can accrue to the contract owner during a specific period, IVA caps or participation rates are higher because the contract owner bears more of the risk. Caps and participation rates are announced at the time of purchase.

In addition to a cap, the Ascend contracts will offer a participation rate option, something the Potential Plus contract lacked, Tope told RIJ. Under such an option, contract owners are credited with a certain portion of the index gain—a percent of a percent—during the designated term, no matter how much the index grows. Participation rates appeal to investors because there’s no obvious restraint on the product’s upside potential in a rising market.

Ascend will also offer a cap option. An indexed annuity cap offers the contract owner all of the index gain over a given period (one, three or six years in this case) up to a limit or cap. Gains in excess of the cap accrue to the issuer. A product with a “spread” (something that Voya doesn’t offer with Ascend) works the opposite way: The first few percentage points of the index gains over a given period accrue to the issuer. All of the net gain above the upper limit of the spread is credited to the contract owner.

According to the prospectus, the commission-based version of Ascend has a six-year surrender period with a first-year surrender penalty rate of 8%. (The fee-based version of the product will presumably have a smaller surrender period or none at all; surrender penalties ensure that the contract issuer recovers the commission paid by product manufacturer to the advisor or broker who sells it.)

Contract owners can also allocate their premium to a separate account, where they can invest it in either a Voya Financial conservative, moderate or growth fund-of-funds, or to a fixed rate account. The prospectus fee table shows that the current annual separate account fee is 1.25%. It is capped at 1.75%. The annual fund operating expenses are 1.14% to 1.16%. These charges don’t apply to the indexed segments or the available fixed rate strategy.

How pricey is your managed account? Check it out

Posted on October 26, 2017 by Editorial Staff -

While robo-advisory firms often downplay the limits of their services, they love to tout their significant fee advantage over advisory firms of the trillion-dollar AUM, bricks-and-mortar, suit-and-tie variety. Even if the DOL fiduciary rule were to vanish tomorrow, robo-advisors and hybrid digital advisors would keep the competitive pressure on.

In a new report, “Beneath the Surface: What Americans are Paying in Advisory Fees,” the robo-advisor Personal Capital does its best to embarrass the big broker-dealers (from whose lunches it would like to steal a few crumbs) by shining a light on their managed account fees.

“Americans… may be paying up to 3.5% per year in advisory fees and fund fees at some of the nation’s most well-known firms,” said a Personal Capital release this week. “While the difference between a one percent annual fee and a three percent annual fee may not seem like much, the total amount lost over time could add up to more than $400,000.”

Personal Capital’s report, based on a May 2017 survey, reveals that 21% of investors know they pay fees on their accounts, but are not sure how much they pay, while 10% of investors don’t even know if they pay any fees on their accounts.

Fee ranges that were calculated for and/or filed with the SEC for a sample of 10 advisory programs that met the report’s criteria, from highest to lowest, include:

Personal Capital suggests that consumers ask their advisors about all-in costs—including annual, ongoing advisory fees, as well as other costs highlighted above—which could be the difference between a one percent and three percent or more in annual fees.

The study focused on investment advisors with a national footprint, a statistically significant number of customers in Personal Capital’s database, and available fee data that Personal Capital’s technology could reliably identify and interpret. To calculate fund fees, Personal Capital aggregated data from a sample of more than 6,000 of its users who are in an advisory relationship and have used our free tool to link their accounts.

For each financial institution in our analysis, Personal Capital said it examined the account history of real users to determine the exact dollar amount of mutual fund or ETF fees they paid as part of an advisory relationship during Q1 of 2017. Dividing the total fund fees paid by the total account values, it determined a weighted average fund fee across all advisory accounts held at each firm.

Ownership of Financial Assets by U.S. Families (2013 vs. 2016)

Posted on October 25, 2017 by Editorial Staff -

Source: “Changes in U.S. Family Finances from 2013 to 2016, Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, September 2017, Vol. 103 No. 3.

Taxes Will Be Cut But Not Reformed

Posted on October 25, 2017 by Kerry Pechter -

As a Treasury official in the Obama administration, Mark Iwry kept his personal opinions largely to himself. The most authoritative of public speakers about auto-IRAs and longevity annuities, he was also the most careful. No one broached the topic of retirement security with more circumspection and deliberation.

But since last January he has been out of government (he’s a non-resident scholar at the Brookings Institute), and as a private citizen he’s free to loosen up a bit. Iwry can even let a few wry barbs fly, which he did as a panelist at the Defined Contribution Institutional Investment Association’s (DCIIA) academic forum in New York last week.

“Every four years or so the nation and the federal government go through the first year of a new administration. I’ve seen a few from the inside and I’ve been struck by the fact that during the first year, the upper reaches of the administration are populated by two personality types: Those who came to run the world and those who want to save it—that is, save it from those who want to run it.

“I used to think that gridlock was a bad thing,” he said drily. “Now, regarding Richard Thaler, whose recent award of the Nobel Prize [for behavioral economics] was well-deserved, and regarding the topic of irrationality in government and human behavior, when you look at the current situation, it’s good that Richard did his work years ago when it was a novel concept. The notion that irrationality is a fundamental fact of life seems less novel today than previously.”

Iwry (right) turned to the topic of tax reform, which DCIIA members are concerned about. They worry that legislators will try to pay for tax reductions for corporations and the wealthy by reducing the cap on tax-deferred contributions to defined contributions plans (currently $18,000 for individuals and $54,000 for certain executives, with an additional $6,000 allowed for those over age 50) to as low as $2,400. Taxable contributions above the cap would go into a Roth 401(k), to be withdrawn tax-free in retirement. (Roth owners can withdraw principal penalty-free at any time and can withdraw gains penalty-free after at least a five-year holding period.)

Iwry expects little besides tax cuts from Congress this fall. “The odds of tax reform coming out of this [legislative] conference are zero percent,” he said. “The odds of tax cuts are considerably higher. Broadening the tax base, eliminating the special tax breaks and complexity in the code, making the rates lower in a paid-for and progressive way—the odds of that happening are virtually nil. The odds of largely unpaid for tax cuts that threaten to increase the deficit—and lead to calls for cuts to critical programs that help the people who are most likely to stop saving or reduce saving if Rothification happens—those look like likely consequences, assuming that some of the cuts will be paid for.

“It looks like full Rothification is off the table. It’s too extreme and too politically suboptimal. Partial Rothification also seems highly unlikely. That’s if legislation is done at all. I put the odds of that as low for this year. There’s pressure to do something before the end of the year. But it’s an awfully tall order to get this done in what is now a matter of weeks.”

Conventional wisdom says that major legislation tends not to occur in even-numbered years, Iwry pointed out, when all 454 members of the House of Representatives and about one-third of U.S. Senators are up for reëlection. But he doesn’t expect tax cut fever to disappear.

“The appetite that has been whipped up for tax cuts for people who are high in the income ladder and for estate tax repeal is unlikely to be sated by continuing promises. So we will get tax cuts sooner or later and Roth will be likely part of it,” he said. “My concern is that [Former House Ways and Means Committee Chairman] Dave Camp’s proposal from several years ago represents one end of the possibilities, not a likely middle.”

The Camp proposal called for capping tax-deferred contributions at $9,000 and allowing an additional $9,000 in Roth contributions. “The [Republicans] would like to be able to argue that the average employee wont be affected by the changes. That’s unlikely to be the case, but there is a talking point to be had by putting the peg at the median level of contributions and set the level at something in the $2,000s… a little south of $3,000,” Iwry said.

“I don’t think that would be justified, but that would be a way to find a peg,” he added. “Later they might get word from the leadership that ‘We need $500 billion in revenue,’” he added. “Then a week later that ‘We need $550 billion.’ The night before the vote, they could hear, ‘We’re looking for $600 billion in new revenue,’ and that will be the number that ultimately determines the cutoff point. It’s reverse-engineered.”

“That brings me to the ‘grand bargain’ possibility. The Democrats’ leverage to get a grand bargain or a full tax package is iffy. It could turn out that there is no grand bargain,” Iwry said.

As for Rothification, it may merely be a “negative shiny object,” he explained, meant to distract the public from a greater danger to the promotion retirement savings: the Republican proposal to lower the tax rate on “pass-through” entities, such as partnerships and S corporations, to 25%. Owners of small business could reduce their taxes by converting to pass-throughs instead of sponsoring 401(k) plans. “The impact on [retirement] plan formation could be affected by a reduction in taxes for pass-through entities. That could be a real problem. It might be worse than Rothification.”

Ruark tracks variable annuity living benefit utilization habits

Posted on October 25, 2017 by Editorial Staff -

Why do some variable annuity policyholders surrender their policies, while others take partial withdrawals or annuitize their contracts? Answers to these and other questions can be found in Ruark Consulting LLC’s Fall 2017 studies, which the actuarial consulting firm released this week.

Ruark based its studies on the behavior of 13.8 million policyholders from January 2008 through June 2017. Twenty-five variable annuity writers participated in the study, comprising $905 billion in account value as of June 2017.

Study highlights include:

Industry surrender rates in the first half of 2017 have recovered to post-crisis levels, following a secular dip in 2016, Ruark found. In addition:

Surrenders at the shock duration (the year after the end of the surrender charge period) were nearly 30% at the onset of the 2008 economic crisis
Shock rates below 10% were observed during 2016
A post-crisis regime has prevailed, with shock rates in a range of 12-16% from 2009 through mid-2015 and 13% so far in 2017

Contracts with a lifetime benefit rider have much lower surrender rates than those with other types of guarantees. Policyholders who have withdrawn no more than the rider’s maximum have the lowest surrender rates.

“The surrender behavior for VAs has changed a lot in last few years,” Timothy Paris, an actuary and Ruark’s CEO, told RIJ this week. “Post-financial crisis, we saw surrender rates go down and stay low even as markets recovered. Then they went even lower in 2016. Now surrender rates are going up to where they were before 2016.

“So it seems like 2016 was an extreme outlier. We think it may have had something to do with angst about the fiduciary rule, because so much of the surrender activity tends to involve exchanges into other products rather than cash-outs,” he added.

“We’ve also seen a continued trend toward more efficient utilization by contract owners of the guarantee income feature. They fall into three categories: Those who take the maximum allowable income of 5%, those who take only two or three percent a year, and those who take much more in a year—as much as 20%.

“We’ve seen a gradual but consistent increase in those taking the maximum. In the past, folks may not have been underutilizing the income feature. They may have been waiting for the 10-year point, when there’s a maximum deferral bonus.”

Annuitization rates on policies with guaranteed minimum income benefit (GMIB) riders continue to decrease. The exercise rate for the riders with a 10-year waiting period is 2.2% by account value.

Living benefit annual withdrawal frequency rates have continued to increase, primarily as a result of increasing utilization efficiency. Withdrawal frequency for guaranteed lifetime withdrawal benefit (GLWB) riders is now over 24%, an increase of two percentage points over the past 18 months.

The effects of moneyness (account value relative to the guarantee base) on partial withdrawal behavior differ depending on circumstances. When contracts with lifetime withdrawal benefits are at-the-money or in-the-money, policyholders increase the frequency of standard benefit withdrawals.

This is consistent with greater benefit exercise when the benefit is more valuable, a Ruark release said. In contrast, when contracts move out of the money, withdrawals in excess of the maximum amount are more common. This is suggestive of policyholders taking investment gains out of the contract.

Detailed study results, company-level analytics, and assumption models calibrated to this data are available for purchase by participating companies. Based in Simsbury, Conn., Ruark specializes in principles-based insurance data analytics and risk management. It has conducted industry- and company-level experience studies of the variable annuity and fixed indexed annuity markets since 2007.

Its behavioral analytics engagements range from discrete consulting projects to full-service outsourcing relationships. As a reinsurance broker, Ruark administers bespoke treaties totaling over $1.5 billion of reinsurance premium and $30 billion of account value, and also offers reinsurance audit and administration services.

U.S. life expectancy declines slightly: SoA

Posted on October 25, 2017 by Editorial Staff -

In the first year-over-year mortality rate increase since 2005, age-adjusted U.S. population mortality rates rose 1.2% between 2014 and 2015, according to MP-2017, the Society of Actuaries’ annually-updated mortality improvement scale for pension plans.

The mortality increase means that life expectancies declined slightly. Implementing the MP-2017 improvement scale could reduce a pension plan’s obligations by 0.7% to 1.0%, when calculated using a 4% discount rate, the SOA’s preliminary estimates suggest.

Mortality from eight of the 10 leading causes of death has increased in the U.S., as reported by the CDC. The life expectancy for a 65-year-old-male pension plan participant declined to 85.6 years using the MP-2017 scale, compared to 85.8 under MP-2016. The average life expectancy for a 65-year-old female pension plan participant declined to 87.6 with MP-2017, from 87.8 with the MP-2016 scale.

But “every plan is different, and it’s important for actuaries and plan sponsors to perform their own calculations and decide how to reflect the impact of emerging mortality changes in their own plan valuations,” said Dale Hall, managing director of research for the SOA, in a release.

The MP-2017 report includes a sensitivity analysis to model the impact of different improvement model assumptions on annuity factors for plan funding. The SOA’s Retirement Plans Experience Committee (RPEC) developed the report. For additional information, you can read the full Mortality Improvement Scale MP-2017 report here.

MP-2017 incorporates the latest publicly available mortality data from the Social Security Administration (SSA) through 2013. It also includes 2014 and preliminary 2015 data, developed by the SOA and obtained from the SSA, Centers for Disease Control and Prevention (CDC), Centers for Medicare and Medicaid Services (CMS), and Census Bureau.

Honorable Mention

Posted on October 25, 2017 by Editorial Staff -

Edward Jones reaches trillion-dollar milestone

Financial services firm Edward Jones has reached $1 trillion in assets under care (AUC), managed by more than 15,000 financial advisors for some seven million clients, according to a release this week. The firm’s growth since 1957 into a Fortune 500 company has been “organic, without reliance on buyouts, takeovers, or mergers.”

Headquartered in St. Louis, Mo., Edward Jones provides financial services in the U.S. (and in Canada through an affiliate), it operates as a partnership owned by its current and former associates. The firm allows advisors to build and run their own practices, while offering access to Edward Jones’ in-house research department, technology and customized tools.

MEPs benefit from bull market: Milliman

Multi-employer pension funds, or MEPs, “are nearing the healthiest they’ve been since U.S. financial markets collapsed in 2008,” according to the Fall 2017 Multiemployer Pension Funding Study by Milliman, the global consulting and actuarial firm.

As of June 30, 2017, the aggregate funding percentage (“funded status”) for all multiemployer pensions climbed from 77% to 81%, thanks largely to favorable investment returns, Milliman said in a release this week. The system’s overall shortfall dropped by $21 billion.

“In aggregate, asset growth for multiemployer plans far outpaced assumptions for the first half of 2017,” says Kevin Campe, consulting actuary at Milliman and co-author of the MPFS. “But that bears little weight for critical plans, which are hurt by their substantially lower asset base. Despite the bull market, we’re seeing the funding gap continue to widen between critical and noncritical plans.”

Of roughly 1,250 plans analyzed in the study, Milliman considers around 75% to be noncritical. Noncritical plans are nearing an aggregate funded percentage of 90%. The funding level for critical plans remains around 60%, however. Some of the most troubled are likely to need help from the Pension Benefit Guaranty Corporation, which itself faces severe financial challenges.

According to the Department of Labor’s Employee Benefits Security Administration:

Under Federal pension law, if a multiemployer pension plan has funding or liquidity problems and falls into “critical” or “endangered” status, it must notify participants, beneficiaries, the bargaining parties, the PBGC and the DOL. To avoid running out of money, it may reduce adjustable benefits and offer no lump sum distributions in excess of $5,000. If a plan is critical and declining, the plan sponsor may ask the Secretary of the Treasury for a temporary or permanent reduction of benefits. Plans in critical and endangered status must adopt a plan aimed at restoring its financial health.

Tax cuts alone don’t enhance growth: Concord Coalition

The U.S. Senate “has abandoned fiscal responsibility” by calling for deficit-financed tax cuts of up to $1.5 trillion over 10 years in its fiscal year 2018 budget resolution, according to the Concord Coalition, a Vermont-based organization that advocates for fiscal prudence.

“The flawed premise of this budget is that tax cuts alone, regardless of their financing, composition or magnitude, will enhance long-term economic growth,” said Robert L. Bixby, Concord’s executive director, in a release.

“This budget fails when evaluated according to some of our key lessons: Tax cuts don’t pay for themselves, PAYGO (pay as you go) is an important standard, and the budget process should be focused on long-term planning,” the release said.

“While the Senate budget claims more than $5 trillion of spending cuts, it does not include enforcement mechanisms to put them into effect. This is in contrast to the fast-track ‘reconciliation’ process used to ease the passage of tax cuts. The more responsible House-passed budget… assumes deficit-neutral tax reform and $200 billion of mandatory spending cuts enforced through reconciliation.”

Matta joins MassMutual DCIO team

MassMutual has appointed Jonathan Matta as regional managing director for the Midwest, responsible for sales of the MassMutual Funds in the defined contribution investment-only (DCIO) market. Before joining MassMutual, Matta was a sales director for Janus Capital Group for more than 10 years, responsible for sales and business development. He served on the Janus Wholesaler Advisory Council. He earned a bachelor’s degree from Ohio University.

Matta’s appointment brings MassMutual’s DCIO sales and support team to 10 members. The team works with MassMutual’s 80 managing directors to support sales of bundled retirement plans. The 51 MassMutual Funds, which offer a multi-manager approach, include the Premier and Select funds and the RetireSMART target-date funds.

Fidelity expands index fund lineup

Fidelity Investments has launched Fidelity Short-Term Bond Index Fund, a new short-duration bond fund, and added two lower priced share classes, Institutional and Institutional Premium classes, to its Long-Term Treasury Bond Index Fund, Intermediate Treasury Bond Index Fund and Short-Term Treasury Bond Index Fund.

Brandon Bettencourt and Jay Small, managers of Fidelity’s existing bond index funds, will co-manage Short-Term Bond Index Fund.

Fidelity Short-Term Bond Index Fund tracks the Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index. It invests at least 80% of assets in securities included in that index. Fidelity Short-Term Bond Index offers four classes: Investor, Premium, Institutional and Institutional Premium.

The Bloomberg Barclays U.S. 1–5 Year Government/Credit Bond Index is a market value-weighted index of fixed-rate investment- grade debt securities with maturities from one to five years from the U.S. Treasury (60%), U.S. Government-Related (13%), and U.S. Corporate (27%) Indexes.

JourneyGuide: A New Income Planning Tool from Ash Brokerage

Posted on October 20, 2017 by Kerry Pechter -

To collaborate effectively on a retirement income plan, advisors and clients need software that thinks as fast as they do. They need software that can incorporate new data and new scenarios and then demonstrate, instantly, how those new factors ripple through other aspects of the plan.

Agility, coupled with simplified digital displays that clients can easily interpret: This is the yardstick by which retirement income planning software is now measured, especially if annuities are part of the workup. As they try to serve more clients and create holistic plans, advisors can’t afford to wait a week between new plan iterations.

A couple of years ago, Ash Brokerage, a Fort Wayne, Indiana, insurance BGA (brokerage general agency) decided that it needed a tool like this. It does business with about 8,000 or so insurance-licensed advisors and planners, and wanted to help them incorporate annuities and other insurance products into retirement income plans.

The project started with an in-house, Excel-based solution to help advisors add annuities to retirement income plans. Then owner Tim Ash brought in a tech wizard from Goldman Sachs, and the project evolved into an independent software company provider called JourneyGuide.

JourneyGuide is slated to open for business by year-end. “We’ve done a beta test with advisors and rolled out some of the features. Now we’re targeting a ‘soft launch’ in early November with the advisors who were with us for the beta test. That will be a fully functional initial release, followed with an official market release about a month later,” said Derek Trimble, JourneyGuide’s CEO (below left).

A tall order

Advisors today rely on technology to help solve a number of problems, Ash Brokerage learned. They need speed and efficiency to offset shrinking margins. They need better documentation. They need a tool that facilitates collaboration with clients. They need a tool that can balance simplicity with specificity. It’s a tall order for software builders.

Greater speed is becoming essential. Advisors want to be able to change their proposals on the fly in response to clients’ questions or the introduction of new information. They want to avoid multiple meetings for multiple plan revisions. If they’re selling products, they want to be able to close a transaction—getting a signature on an advisory agreement or agreement to a product purchase—at a single meeting.

They also need a comparison tool. If they want to introduce products, such as indexed or income annuities, they need to be able to demonstrate that the product will improve a client’s existing plan. It must either raise the client’s retirement income, increase the percentage of income that comes from guaranteed sources, raise the funded ratio of her liabilities, allow him to take more equity risk, or all of the above.

Anticipating greater regulation—especially if they’re dealing with SEC, DOL and state-regulated products or accounts within the same financial plan—advisors also need end-to-end documentation, preservation and archiving of their reasons for recommending specific products or strategies. Tools need to be customized to reflect broker-dealer sales restrictions or product shelf limitations.

With respect to products and regulation, the software needs to be specific enough to provide close approximations of the costs and benefits of specific products or product categories, but generalized enough so that the tool remains “product agnostic,” especially where qualified money is involved.

Taking ownership

Journeyguide hits several points on this punchlist. They wanted the tool to be product agnostic. They didn’t want to provide end-to-end fulfillment, because advisors wanted to stick with their own well-established fulfillment routines. They wanted to help advisors sell annuities without creating a bias toward annuities.

“Our initial release will focus on incorporating income annuities into the plan,” Trimble told RIJ. “We have direct integration with the CANNEX pricing tool, so the advisor and client can have real-time pricing. We will be adding variable and index annuities in the future.”

The tool was built with advisors’ goals in mind. “Getting the client over the hump of their initial skepticism is something that we tried to help the advisor with,” said Michael Smith, JourneyGuide’s Chief Solution Architect. “The advisors are building the plan with the client. They get a feeling for what it will take to close the deal, and the clients feel as if they came up with the idea. It’s a logical progression.”

There’s a critical point in meetings with clients, Smith said, where the advisor will need to suggest a modification to a plan so that the client can meet a desired income target or a likelihood-of-success target. The advisor wants to be able to solve for that problem on the spot, achieve the goal, and keep the conversation moving toward a commitment.

“What we heard from advisors in building this, and they struggle with this, is that they reach a point where they need to show the client how to improve their existing plan,” Smith said. In some cases, that’s the point where an advisor can suggest an annuity.

“There are three ways an advisor can improve a plan,” he told RIJ. “One involves Social Security: you can work longer and claim later. The second is to adjust the asset allocation and take more risk. The third thing is to add a guaranteed solution.” If the client feels boxed into a plan with too little income to low a chance of lifelong sustainability, annuities can help.

The tool can display a “crossover” point where the allocation to a guaranteed product provides just enough safe income without excessively dampening upside potential. If the clients reach that point by moving the dials themselves, so to speak, then the clients doesn’t just yield to an advisor’s plan, they embrace it as their own.

“It’s interactive,” said Smith (at right). “The client can see, ‘This is my best plan going forward.’ The advisor can close right there instead of telling the client, ‘I’ll get back to you in a week.”

Because the target audience of JourneyGuide is hybrid Registered Investment Advisors—advisors “dually-licensed” to sell insurance and investment products—along with bank advisors and advisors at insurance company-owned brokerages, its creators wanted it to be annuity-friendly, but not biased toward any particular type of annuity.

So they used sample pricing in their annuity modeling process. In the case of SPIAs, for instance, they wanted to provide a certain level of price-specificity without introducing a specific product. They asked CANNEX to take an average of the prices or payout rates of five leading products, and that’s what they show the client when testing a SPIA (single-premium immediate annuity) recommendation.

Better than spreadsheets

Smith joined Ash Brokerage three years ago at the invitation of owner Tim Ash. Smith had been working in IT at Goldman Sachs, where he developed and patented an algorithm for generating asset allocation recommendations for high net worth clients. He arrived at the same time as Jeff Rocke, an estate planning attorney.

“Mike and Jeff are the brains behind JourneyGuide,” Trimble told RIJ. “We knew we needed something better than Excel spreadsheets to make our point. They were able to show that adding guaranteed income streams improve retirement outcomes, increase floor income, and protect against longevity risk.”

As noted above, the project expanded from an internal Ash Brokerage product to building a free-standing company with its own software offering. “Six months ago we made a breakthrough in terms of the algorithm, and now we can do those calculations in seconds. So Tim said, ‘We want to build the software.’ Our long term goal was to provide software-as-a-service,” said Smith.

Trimble, Smith and their team are assuming that the regulatory environment for annuities will remain challenging, whether the Trump administration allows the DOL fiduciary rule to remain intact or amends it to allow variable and indexed annuities to be sold without the Best Interest Contract Exemption or rescinds it entirely.

“In talking to the dually-registered [investment and insurance licensed] folks about the DOL, we hear two extreme predictions. Sometimes we hear that they expect the DOL rule to go away completely. Then we hear that the DOL fiduciary standard will be applied to non-qualified accounts in addition to qualified. Even if the rule doesn’t happen, we think it makes sense for us to position ourselves as product-agnostic,” Smith said.

Future iterations of the JourneyGuide software will include variable annuities and indexed annuities. They will also introduce a Social Security optimization tool and, later on, an ability to model the need for long-term care insurance.

“The next big chunk will be full-blown optimization, where we can calculate the right combination of annuities that would maximize a client’s income, or success rate, or final balance at a particular likelihood,” said Trimble. As for estimating longevity, “We don’t include an actuarial calculation. Our default “retirement plan end age” is 95 years, but clients can suggest whatever ‘end age’ they want.”

Nationwide offers ETFs with a French flavor

Principal and NCR ink pension risk transfer deal

Rising stock prices boost 401(k) account balances: Fidelity

Edward Jones reaches trillion-dollar milestone

MEPs benefit from bull market: Milliman

Tax cuts alone don’t enhance growth: Concord Coalition

Matta joins MassMutual DCIO team

Fidelity expands index fund lineup

Data Connection

Lists*