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Betterment to offer direct online charitable giving

Posted on November 16, 2017 by Editorial Staff -

Betterment, the digital advisor, has launched a Charitable Giving service that allows users of the online asset allocation and investment tool to donate appreciated mutual fund shares directly to charities from their Betterment accounts. The service will be available to customers on November 28th, 2017.

According to a Betterment release, clients decide how much to donate and Betterment will fund the gift with the most appreciated shares in their portfolio. Clients get a deduction of the market value of the shares from their taxable income while avoiding a sale that would trigger capital gains taxes. Charities get the full donation, without the friction of intermediary fees.

At launch, Betterment will have several charities for users to donate directly to: The Breast Cancer Research Foundation (BCRF), UNICEF USA, World Wildlife Fund, Feeding America, Big Brothers Big Sisters of NYC, Save the Children, Wounded Warrior Family Support, Hour Children, Against Malaria, DonorsChoose, and GiveWell.

The Betterment release did not describe its Charitable Giving service as a donor-advised fund, which would allow clients to transfer to the fund, get a tax deduction, and later decide which charities to give to. Fidelity Charitable, founded in 1991, granted about $3.5 billion to charities in 2016, according to Fidelity’s website. Vanguard’s Charitable Endowment Program, started in 1997, received $1.3 billion in donations and paid out $704.5 million in grants in 2016, according to GuideStar.

It’s official: Jackson National VA will feature Vanguard fund options

Posted on November 16, 2017 by Editorial Staff -

Jackson National Life this week officially announced the launch of Perspective Advisory II (PAII), a fee-based variable annuity with no surrender charge. The product is designed for registered investment advisors and is the first Jackson variable annuity to offer Vanguard fund options.

The launch was reported in the October 12, 2017 edition of Retirement Income Journal. On September 25, 10 new Vanguard funds became available as investment options across Jackson’s product offerings.

Perspective Advisory II’s features include:

Compensation structure: Advisor compensation is fee-based, rather than commission-based.
Product cost: PAII offers institutionally priced subaccounts with no 12b-1 fees, commissions or withdrawal charges.
Surrender period: There is no surrender period and zero withdrawal charges or related waivers.
Investment freedom: More than 130 investment options are available.

Product guarantees: Living and death benefits are available for an additional charge.

“Following the release of the U.S. Department of Labor fiduciary rules, we fully recognize the need and demand for fee-based products,” said Brian Sward, senior vice president of Product and Investment Management for Jackson National Life Distributors LLC (JNLD).

“Since entering the fee-based space about a year ago, we’ve formed relationships with new advisors who haven’t traditionally sold our products or done business with Jackson.”

China AUM (2016 to 2030 est. US $Tr.)

Posted on November 9, 2017 by Editorial Staff -

Source: Casey Quirk (Deloitte), “Leadership in Times of Plenty: Future Winners in China’s Asset Management Industry,” November 2017.

Hope, Despair: SPARK Forum Has It All

Posted on November 9, 2017 by Kerry Pechter -

Give President Trump credit for this: There have been no dull retirement industry conferences this fall. By throwing health care policy, retirement policy and tax policy into states of confusion, he has helped boost conference turnout and infused ordinarily dry panel discussions with a blend of hope and despair.

This week, the SPARK Forum, a trade show and retirement industry conference, was held at The Breakers in Palm Beach, FL. SPARK serves the defined contribution recordkeeping community, which includes life insurers, banks, mutual fund companies, third-party administrators, benefits consultants and the information technology vendors that serve them.

There was much political speculation, to be sure. But a bunch of hard news also came out of the conference. Millennium Trust, Paychex and GuidedChoice have introduced a new nationwide workplace IRA program. William Meyer pitched his Social Security-centric income planning tool for plan participants. And BlackRock hinted that it’s been tinkering with a design for target date funds (TDFs) with a deferred annuity sleeve.

Opportunity from mandates

A fairly significant event in the world of small-plan 401(k)s was announced at the conference. Millennium Trust, a Chicago-area firm that custodies orphaned 401(k) accounts as rollover IRAs, Paychex, the $2.3 billion provider of outsourced payroll, benefits and retirement plan services to small companies, and GuidedChoice, the 401(k) and IRA managed account provider, said they plan to offer SIMPLE IRAs to small companies.

The new venture is a response to the wave of activity in more than 20 states to make workplace savings plans available to the millions of U.S. employees who don’t currently have access to one. California and Oregon are even mandating most employers to start offering a plan or to let workers enroll in a state-sponsored Roth IRA program. (In a reversal of Obama administration policy, the Trump administration is thwarting the creation of state-sponsored workplace IRA programs, which some private sector providers regard as unfair competition.)

A SIMPLE (Savings Incentive Match Plan for Employees) IRA differs from, for instance, a traditional IRA, a SEP (Simplified Employee Pension) IRA or a Roth IRA. At $12,500 ($15,500 for those over age 50), the SIMPLE IRA has a higher limit on tax-deferred contributions than a traditional or SEP-IRA. In contrast to a Roth IRA, contributions to a SIMPLE IRA are taxed on distribution rather than contribution. As in 401(k) plans, SIMPLE IRAs can accept employer matching contributions and employees can be automatically enrolled.

The rationale for the Millennium-Paychex-GuidedChoice partnership is that if small company owners are forced to offer retirement plans, many will prefer to partner with a familiar name like Paychex than to adopt an untested state-run plan. “The state-run programs are driving the conversation,” said Ken Burtnick, senior product manager at Paychex. “If the state plans weren’t a threat, we’d still be at ‘business as usual.’” Paychex, Millennium Trust and GuidedChoice also think they can underprice the state-run plans. They also think they can compete with Vanguard, a direct seller of SIMPLE IRAs.

Optimizing Social Security

Plan sponsors and their advisors, Social Security expert William Meyer told SPARK attendees, should think about offering software to participants that will help them maximize their Social Security benefits and minimize their taxes during retirement. He gave a presentation on the Social Security claiming strategy software that his company licenses.

Meyer and frequent collaborator William Reichenstein are widely recognized experts and authors on Social Security optimization. With respect to maximizing income in retirement and ensuring that savings last for a lifetime, Meyer eschews the conventional wisdom about safe withdrawal rates or life annuities. He also rejects the rule of thumb that retirees should spend down taxable money, tax-deferred money, and Roth IRA money, in that order.

Instead, he focuses on the benefits of delaying Social Security benefits, using Roth IRA conversions where beneficial, and employing dynamically-adjusted, ultra-tax-efficient decumulation strategies that, as he tries to demonstrate in his presentations, will enable retirees to make their money last up to ten years longer and/or save them hundreds of thousands of dollars.

Although his methods implicitly deliver the most savings to the wealthiest retirees, Meyer says his methods will help people across the wealth spectrum. Because his software is user-friendly enough for the typical plan participant, he said, it will give advice-hungry participants an alternative to leaving their plans and rolling over to an advisor-managed IRA. “If you don’t provide this kind of service, people are going to leave your plan,” Meyer said.

In-plan annuities?

At institutional retirement plan conferences like SPARK, there’s always an obligatory discussion on in-plan annuities. The topic keeps coming up because recordkeepers (10 of the 20 largest are owned by insurers ) would like to reduce the flow of large accounts out of 401(k) plans to rollover IRAs when employees retire.

“Are We Ready for Income Distribution at Retirement?” was the name of the next-to-last panel discussion at the conference. The three panelists were Doug McIntosh from Prudential Retirement, Stacey Ganina of BlackRock Defined Contribution Investment Strategy, and Bransby Whitton, a product strategist at PIMCO. The short answer to the question is “No.”

BlackRock, according to Ganina, has been studying the possibility of creating a version of the firm’s LifePath TDF series that includes a multi-premium deferred income annuity sleeve. Before retirement, participants would gradually move part of their money into the annuity and receive lifelong payments at retirement. But the product is still in the design stage. “It’s not on offer yet,” she told RIJ.

Prudential Retirement has been selling its Income Flex product for ten years, said McIntosh. It’s essentially a variable annuity with a guaranteed lifetime withdrawal benefit (GLWB), but institutionally priced and tied to a Prudential TDF. Ten years before retirement, TDF investors begin paying 100 basis points for an income guarantee that, if switched on during retirement, would provide income for life with liquidity for emergencies. McIntosh said the product has half the in-plan GLWB market and gains a few new plan sponsor clients per year, but Income Flex so far hasn’t fulfilled its initial promise. The financial crisis may have had something to do with that.

The in-plan annuity concept faces headwinds, and not just because plan sponsors are afraid of getting sued because they picked the wrong life insurance provider. There’s no strong evidence that, except perhaps at Fortune 500 plans, more than a modest percentage of participants leave their companies for retirement—as opposed to leaving for a different job—or that, of those, more than a modest percentages of those who retire have plan balances large enough so that 30% or even 50% would fund a meaningful annuity. In short, there’s no critical mass of participants clamoring for in-plan annuities.

Sizzle switch

The sizzle in the retirement plan business has historically been on the investment side, where selling risk is the agenda. The administrative side of the business, including SPARK’s constituency of technology vendors to the big recordkeepers, has generally been a quieter, less sexy part of the world. It’s a world of long-term relationships rather than hot dates.

But today, the sizzle is moving. Plan sponsors are spending less on investments and more on supporting participants with digitized education efforts. Joe Ready, who runs Wells Fargo Institutional Retirement & Trust, said this stems from the shift to low-cost index investing in plans and the new focus on “financial wellness” and income planning. The economics of the plan business may be turning upside down.

Legal Limbo: Attorneys Await DOL Resolution

Posted on November 9, 2017 by Kerry Pechter -

Merry L. Mosbacher runs the insurance and annuity business at Edward Jones, a financial services firm with 15,000 advisors. Todd Solash is president of Individual Retirement at AIG, the financial crisis survivor that sold some $7.4 billion worth of annuities in the first half of 2017.

These two influential annuity executives, a distributor and a manufacturer, respectively, probably agree on many issues. But they disagree on at least one: the value of fixed indexed annuities (FIAs) for investors. AIG sells a lot of FIAs, and Solash is bullish. Mosbacher remains unconvinced; there are no FIAs on Ed Jones’ product shelf.

Last Thursday they faced off on the topic, in a friendly way, in front of some 300 securities and insurance attorneys during the American Law Institute–Continuing Legal Education’s 35th annual conference last week at the Capital Hilton in Washingtonon, in a conversation moderated by consulting actuary Tim Pfeifer, president of Pfeifer Advisory.

The indexed annuity market is, of courrse, in regulatory limbo. The Trump administration has at least temporarily stopped the implementation of parts of the Obama Department of Labor’s “fiduciary rule” that would make it harder to sell variable and indexed annuities to IRA clients for a commission. The rule, in its current form, would also create the potential for a wave of class action lawsuits against the financial industry.

But it’s still unclear if that postponement will end in seven weeks, on January 1, 2018, or last until July 1, 2019, as the Trump DOL has proposed. A pending review of the proposal by the Office of Management and Budget will help determine that.

‘Manufacturered’ return

Over the past five years or so, indexed annuities have been, from a pure sales perspective, the brightest spot in the annuity firmament. Their commissions make advisors want to sell them and their value proposition—more upside than bonds with zero risk to principal—has found an audience. But they’re likely to remain a niche product until they win over the Merry Mosbachers of the world.

“We don’t offer any equity derivatives,” Mosbacher said, referring to the options that drive FIA returns. “It’s a manufactured return, and we have problems with that as a source of return for our type of customer. It’s not aligned with what we think our clients need. With the indexed products, the sales message often goes: In a period low interest rates, you get the upside of the equity market but not the downside. That’s what customers hear.

“We want our clients to understand the risks of what they buy. The indexed annuity is nothing more than a floating-rate fixed deferred annuity with a yield of up to four percent. Is it worth it to take that kind of risk? We haven’t been able to get the math to work out where the answer is ‘Yes.’ And when we ask the carriers about it, no one has been able to prove that they’ll get a higher return on an indexed annuity than they will on a fixed.

“We’ve been paying a lot of attention to the fee-based variable annuities. We’re not offering them now, but we recognized that we’re all going to a fee-based world. That trend was only accelerated by the DOL rule. We don’t like today’s fee-based products. It would be a cost increase for our clients to strip out the commission and put them in a fee-based product.”

But AIG’s Solash, a former AXA executive, claimed that indexed annuities meet certain needs that other financial products don’t. “AIG is in all of these businesses—variable, indexed and fixed annuities—and we’re unique in that respect. It lets us adapt to market changes and changing client needs. The indexed annuity’s message—you get a floor of zero losses but also equity exposure—is a powerful one. That’s a product that should have its time. It gives investors a different spot on the efficient frontier, a different outcome.

“We have a real demographic problem and a real public need [with regard to retirement financing], and we shouldn’t make it hard to sell these products. That’s why some of the regulation is detrimental. If annuities are too hard to sell, then products won’t get talked about at all. We think that’s a big problem for clients. They need protection.

“It’s a interesting time. There’s never been a time with so much convergence and confusion. It’s very much mix-and-match. As manufacturers we actually provide very specific risk-appetite and risk/reward combinations, but it’s hard on us. The world is built around fixed silos. Things are mixing in ways that are positive. But it’s difficult for all of in the ecosystem.”

Lingering uncertainty

Last week ended on a note of relief for the defined contribution industry, with House Majority Leader Paul Ryan announcing that the Republican tax proposal would not shrink tax deferral for retirement savings to offset the 10-year, $1.5 trillion tax cut he hopes to push through the Senate and onto the president’s desk. But the lawyers who gathered for the ALI-CLE conference on securities and insurance law still had lots of shop to talk.

There were several items of general retirement-industry interest that came up during this admittedly specialized conference for a specialized segment of the legal community. Tim Pfeifer, a consulting actuary, offered a roundup of recent developments across the deferred and immediate annuity landscape.

LTCI-annuity hybrids. “There’s a lot of pent-up interest in adding long-term care insurance features to annuities,” he said, with declared rate fixed annuities the most likely vehicle. “That’s been causing a bit of a stir, with several companies thinking about offering them.”

Fewer FIAs with living benefits. “There’s a reduced focus on adding guaranteed lifetime withdrawal benefits to indexed annuities. Although GLWBs were once a prime driver of FIA sales, that importance has declined in the last three years. About 50% of FIA sales involves a GLWB rider, but that figure used to be as high as 65% or 70%.”

Deferred income annuities. “Companies are now looking at DIAs as possibly having an indexed feature. When income begins, it would have an indexed growth component,” Pfeifer said. That could help perk up DIA sales, which slipped early in 2017 before flattening out. Companies see the index-linked DIA as a potential competition for variable annuities with GLWBs, SPIAs and conventional DIAs. Issuers—Nationwide may be one—are also looking for ways to add liquidity features to DIAs to ease contract owners’ fears about irrevocability.

FIA commissions. “The average commission on an FIA used to be about 8%. That figure is now around 5%,” he said. If that’s true, then VAs now offer the highest commission, at about 7%. Pfeifer attributed the decline in FIA commissions to the DOL fiduciary rule as well as to the increase in sales of FIAs at brokerage firms, where they come under FINRA scrutiny.

Impaired life annuities. “We’ve seen one company using substandard annuities for long-term care needs.” For people who are not in good enough health to qualify for long-term care insurance, “substandard” annuities (aka “medically underwritten” or “impaired” annuities) offer a way to maximize future income to cover medical costs. [Anecdotally, one insurer offered the SPIA pay rates for a 70-year-old to a 64-year-old policyholder in poor health.)

ILVAs. Pfeifer noted the growing success of indexed-linked variable annuities (ILVA), which are also known as structured variable annuities. Voya will introduce its Ascend ILVA in early 2018; it will join Allianz Life, AXA, Brighthouse (formerly MetLife), and Members & Investments (a unit of CUNA Mutual Group) in that space. ILVAs are classified as securities because, unlike FIAs, they can result in loss of principal.

Lessons from Tax Reform School

Posted on November 9, 2017 by Eugene Steuerle -

Do you want to know why tax reform is so hard? Consider one seemingly simple idea that has been floated by President Trump and congressional Republicans in their Unified Framework: Roughly doubling the standard deduction.

The closer you look at this proposal, the more you see how complicated it is.

Is doubling the standard deduction a good idea? Well, maybe. By granting more taxpayers a larger reduction in taxable income without making them itemize a list of specific deductible expenses, boosting the standard deduction can substantially simplify the tax filing process. It would also reduce taxes for some middle-income households.

But… It costs money. The Framework would partially offset the expense by eliminating the personal exemption.

But… Exchanging a larger standard deduction for repeal of the personal exemption raises the relative burden of taxes on households with children.

But… The Framework attempts to offset the elimination of personal exemption with a bigger child credit. That might help reduce some of the higher taxes caused by repealing the personal exemption.

But… These adjustments cost revenue and so would reduce the amount of rate reduction that Congress can pay for.

And… The share of households (including non-filers) that itemize with the larger proposed standard deduction would be reduced, perhaps to as little as 5%, depending upon what happens to specific deductions.

But… If Congress reduces the number of itemizers, it would also reduce the number of people who’d take deductions for charitable giving, home mortgage interest and state and local taxes paid. That, in turn, has charities, homebuilders and state and local government officials worried.

And… Retaining tax incentives only for the highest income households makes zero sense for provisions meant to encourage families to own homes or give to charity.

But… Congress could create alternative subsidies for charitable donors, homebuilders and state and local governments.

But… That could cost more foregone revenue and reduce the size of any tax rate reduction that could be paid for.

And, whoops… So far, we’ve pretty much forgotten about the poor and moderate-income taxpayers who would benefit little or not at all by an increase in the standard deduction.

But… To help them requires yet more money and reduces the amount of rate reduction that can be financed in a tax reform package.

Thus, each decision on each individual change not only causes new interactions affecting the amount of revenue other provisions in a bill would gain or lose, but it alters the distribution of winners and losers among individuals and industries that also must be addressed.

And… These are some of the effects of only one simple reform. Now, think of what Congress and the President must tackle in a bill that revises the taxation of capital and labor, multinational corporations and partnerships, pensions and insurance.

And… You will get some inkling of why, as the president might say, “nobody knew” tax reform would be so hard.

‘Auto-portability’ undergoes its first test

Posted on November 9, 2017 by Editorial Staff -

America is littered with small, “stranded” 401(k) accounts. Most are worth less than $1,000. Many of these abandoned purses have been converted to rollover IRAs and warehoused at trust companies. Sometimes they’re reunited with their owners, sometimes not. Collectively, they represent a significant business opportunity.

As previously reported in RIJ, Retirement Clearinghouse (RCH), a Charlotte, NC-based company, has been trying to jump-start the adoption of an electronic network—driven by proprietary “auto-portability” technology—to transfer these accounts from IRA warehouses automatically and roll them into their owners’ next 401(k) plan.

From July to October 2017, RCH tested the feasibility of auto-portability in a large North Carolina healthcare company’s 401(k) plan. About 400 of 3,000 former participants gave RCH permission to roll their safe harbor IRA balances into their active 401(k) plan accounts, according to a newly-published evaluation of the pilot program by Boston Research Technologies, a consulting firm working with RCH.

RCH claims that auto-portability can help staunch the “leakage” of savings from 401(k) plans that often occurs during job transitions. Many people, especially low-income or minority workers with brief job tenures, often forget about old 401(k) accounts or cash them out and spend the money between jobs. If their money moved automatically to their next plan, RCH contends, they wouldn’t be tempted to spend it; over a career, they’d be more likely to accumulate enough savings to retire on.

To make auto-portability a success, according to RCH, a critical mass of large 401(k) recordkeepers—Vanguard, Fidelity and T. Rowe Price fit that description—would need to embrace it. Just as important, the Department of Labor would need to allow plan sponsors to auto-enroll participants in the roll-in program when they join their retirement plans.

Auto-portability relies on technology similar to that used by credit card companies to validate and fulfill transactions. It involves four processes: an electronic-record location search to identify multiple accounts potentially belonging to the same individual; a proprietary “match” algorithm to confirm the located accounts belong to the same participant; receipt of the participant’s affirmative consent to consolidate accounts in their active retirement plan account; and an automated roll-in transaction.

The new report, “Making the Right Choice the Easiest Choice: Eliminating Friction and Leaks in America’s Defined Contribution System,” evaluates on RCH’s North Carolina demonstration project. It was released this week by Warren Cormier, founder and CEO of Boston Research Technologies. Cormier is also involved with the National Association of Retirement Plan Participants’ recent launch of a workplace IRA program called Icon.

In its study of the RCH pilot, Boston Research Technologies collected and analyzed data from more than 3,000 participants who had both a safe harbor IRA and an active plan account with their current employer. It found that:

15% of participants with matched accounts responded to the roll-in offer, a rate higher than direct mail solicitation and an indication of pent-up demand.
91% of the responding participants consented to the transaction and had their savings consolidated in their active-employer plan.
9% of participants opted out of the program, with a majority cashing out their accounts.
Of the account balances that were consolidated through a roll-in, 56% were less than $1,000—a suggestion that, when given the choice, most participants will retain these balances and not want to cash out, the report said.
Upon consolidation, workers’ median plan account balance increased by 46% and the combined future value of their preserved savings was projected to be more than $3 million at normal retirement age.
85% of participants with matched accounts did not respond to the roll-in offer, but their lack of response was “likely the result of self-destructive behavior or lack of knowledge about where to start rather than a preference to cash out,” Cormier’s report said.
90% of accountholders with stranded accounts worth less than $5,000 opted to roll their assets into a safe harbor IRA—but of those accountholders, 86% had been in a safe harbor IRA for more than one year, and 44% were in a safe harbor IRA for more than three years.

“Auto-portability helps participants overcome the structural frictions embedded in the consolidation process, making the decision to roll in as easy as the decision to cash out,” said Cormier, in the release. “A mechanism is needed to surmount the remaining cognitive frictions, such as procrastination, hesitation, and indecision.

“The utilization of a negative consent mechanism would lead to the preservation of billions of dollars in retirement savings that are currently being cashed out by participants at alarmingly high rates.”

Boston Research Technologies publications include the 2013 report “Eliminating Friction and Leakage in America’s Defined Contribution System” and the 2015 study “Portability and The Mobile Workforce.”

RCH was formerly known as Rollover Systems. The founder, president and CEO of RCH is Spencer Williams, an executive formerly with MassMutual. He and Tom Johnson, another former MassMutual executive, have spent several years promoting auto-portability to 401(k) recordkeepers, plan sponsors and Washington officials.

The owner of RCH is Robert Johnson, the Charlotte businessman who created and later sold Black Entertainment Television to Viacom in 2000 for more than $2.3 billion in Viacom stock.

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.

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