Archives: Articles

IssueM Articles

Icon: An IRA for ‘Gig’ Workers

Posted on October 20, 2017 by Kerry Pechter -

Icon, a portable retirement savings plan with “institutionally-priced investments” and a “tech-forward simplified interface,” has just been announced by the National Association of Retirement Plan Participants, a San Francisco non-profit. It joins a number of solutions, ranging from Goldman Sachs’ Honest Dollar to California’s state-sponsored Secure Choice plan, in the race to serve Americans with no retirement savings plan at work.

Icon is unusual: Its creator, NARRP, has only a president, Laurie Rowley, and a handful of staff, but will partner with giant asset managers; while employers can use it, its target market is the millions of self-employed workers in the new “gig” economy; its product is a traditional IRA, not a Roth IRA, which state-sponsored plans and the now-cancelled federal MyRA program offered.

NARPP, which was the subject of a 2014 feature in RIJ, is the creation of a team of behavioral finance entrepreneurs, including Rowley; the widely known academic and author Shlomo Benartzi, its co-founder emeritus; and Warren Cormier, its chief behavioral officer and CEO of Boston Research Technologies, a consulting group.

Cormier, who attended the academic forum of the Defined Contribution Institutional Investor Association conference in New York this week, told RIJ that Icon would use behavioral techniques to help people save, and that NARRP would providing the communications and “glue” that would bind together the masses of individual participants.

According to NARPP, Icon users will pay about $5 a month for recordkeeping, custodial service, customer support, education and help with “holistic financial wellness.” Icon uses auto-default to place savers into an age-appropriate target date fund, savers can also opt out of the TDF and select their own mix of funds. Users can pre-order Icon beginning Wednesday November 1, with onboarding starting January 2018.

Strategic partners include Dimensional Fund Advisors, which is offering mutual funds at “low institutional prices,” and State Street Global Advisors (SSgA), which is offering a target date fund for 13 basis points per year. The average target date fund fee is 90 basis points, according to NARRP. Aspire, the Tampa-based third-party administrator, has signed on as Icon’s recordkeeper.

Icon won’t have some of the levers that other types of plans have. There’s no mandate requiring people to use it, as there is in state-sponsored workplace IRA plans. Nor can it use auto-enrollment to default people into the plan, even when they have a formal employer, because it won’t be regulated by the Employee Retirement Income Security Act of 1974 (ERISA).

“The two critical ingredients necessary for a dramatic breakthrough in plan coverage are the two they are missing,” one informed observer said.

Despite its name, NARPP is not a grassroots organization of plan participants or an advocacy group like the Washington-based Pension Rights Center. It is not related to any of the state-sponsored workplace IRA programs that have emerged in a few progressive states like California and Oregon.

Asked if non-profit status brought any advantage to NARPP and Icon, Cormier told RIJ, “AARP is interested in partnering with us, and they said they wouldn’t consider that if we weren’t a not-for-profit.”

“Icon is a hybrid plan that combines the best aspects of an employer sponsored plan (e.g., 401(k)), along with the flexibility of a self-directed plan (IRA),” the release said. It “is an entirely new paradigm for providing retirement benefits to a labor force that is rapidly evolving away from the traditional employer-employee model.”

NARPP says it aims to serve an estimated 55 million working Americans who don’t have access to an employer sponsored savings plan. That number includes employees of small businesses that don’t offer a retirement plan, and contract or “gig” workers.

In contrast to traditional, federally-regulated retirement savings plans:

Individuals can join independently.
Small employers can implement Icon as a payroll deduction with no legal or federal filing requirements, no plan administration and no on-going costs.
Gig platforms companies can make Icon available at the pay level without triggering employment status changes.
Large employers can make Icon available to their independent workforce as a payroll deduction without triggering ERISA or employment status changes.
Companies can use Icon as an employer facilitated retirement plan.

Employers using Icon would not have the legal burdens, federal filing requirements, expense, or administrative duties associated with running a 401(k) plan under ERISA, according to NARPP. Contributions are transacted at the payroll level.

“Icon exists within the current regulatory structure of a payroll IRA, and offering Icon will not trigger independent contractor status or voluntary work arrangements, thus paving the way for gig platforms to offer Icon at the payment level for workers who use their platforms,” the release said.

“The percentage of employees offered any retirement plan by their employer has plummeted over the last fifteen years from 64% to 43%,” said Cormier, in the release. “We cannot gain ground on improving retirement security until we solve key structural problems in how people access retirement savings plans.”

Follow the Money: Vanguard’s new REIT II Index Fund draws $6.3 billion in September

Posted on October 20, 2017 by Editorial Staff -

Investors put a net $12.7 billion into U.S. equity passive funds and pulled a net $18.5 billion out of U.S. equity funds in September, according to Morningstar’s report on U.S. mutual fund and exchange-traded fund (ETF) asset flow for September 2017.

The flow into U.S. equity passive rose by almost half, from $8.5 billion in August 2017, while the flow out of U.S. active fund declined by almost 20%, from $23.0 billion in the previous month, the report said.

For Morningstar’s commentary on the flows, click here. (Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.)

In other highlights from the report:

Despite expectations of another incremental interest rate hike by the Federal Reserve this year, taxable bond remained the leading category group in September with $34.9 billion in flows overall, up from $27.5 billion in the previous month. Unlike in August, however, passive taxable-bond flows surpassed active ones: $20.5 versus $14.4 billion.

Sector equity saw $10.5 billion of inflow in September, after sustaining a $4.2 billion outflow in August. The flow was driven by the real estate Morningstar Category and by a net flow of $6.3 billion into Vanguard’s new REIT II Index Fund.

International equity flows fell to $9.8 billion in September compared with $16.1 billion during the previous month. The decline may have been driven by Britain’s planned exit from the European Union and Catalonia’s attempted secession from Spain.

The three Morningstar Categories with the highest inflows in September are intermediate-term bond, foreign large blend, and real estate. The three Categories with the largest outflows are large growth, large value, and allocation—50% to 70% equity.

Passive. On the passive front, Vanguard was the top fund family, with inflows of $28.1 billion, followed by BlackRock/iShares with inflows of $18.5 billion. Vanguard’s newly created REIT II Index attracted the highest flows of $6.3 billion immediately after its inception, boosting overall flows for the entire real estate category and sector-equity category group.

Vanguard Total Bond Market II Index Fund and Gold-rated Vanguard Total Stock Market Index Fund followed, with respective inflows of $4.0 billion and $2.5 billion.

Vanguard Institutional Index Fund and PowerShares NASDAQ-100 Index Tracking ETF had the highest outflows, $1.2 billion and $1.0 billion, respectively.

Active. In active flows, PIMCO led with $3.2 billion. The two active funds with the highest inflows were PIMCO Income, with flows of $2.7 billion, and Vanguard Growth and Income Fund, with $2.2 billion in flows. Fidelity, Franklin Templeton, and T. Rowe Price sustained outflows from their active funds. Fidelity Series Emerging Markets had the highest outflows—$1.8 billion—among active funds in September.

GAO and CBO publish major retirement analyses

Posted on October 20, 2017 by Editorial Staff -

The Government Accountability Office and the Congression Budget Office each issued major white papers this week. The GAO’s report is entitled, “The Nation’s Retirement System: A Comprehensive Re-evaluation Is Needed to Better Promote Future Retirement Security.” The CBO’s report is entitled, “Measuring the Adequacy of Retirement Income: A Primer.”

Retirement Income Journal hasn’t had time to read or evaluate these documents. An article reviewing the papers will appear next week in the October 26, 2017 issue.

Goldman Sach’s workplace IRA will waive wrap fee in 2017

Posted on October 20, 2017 by Editorial Staff -

Honest Dollar, Goldman Sachs’ “digital retirement savings provider,” will waive its account or “wrap” fee on client portfolios through 2018, the firm announced this week. Beginning in January 2019, account fees will be $1 per month for balances of $5,000 or less and 25 basis points annually for balances above $5,000.

The IRA savings service for small and mid-sized businesses, self-employed individuals, independent contractors, won’t be free, however. The expense ratios of the underlying exchange-traded funds and mutual funds (9 to 13 basis points per year) will still be deducted from the funds’ net asset values, a release said. The wrap fee also does not include “additional costs that are charged by the custodian for ancillary services.”

[See related story on today’s homepage about “Icon,” another workplace IRA program for workers at small firms or in the “gig” economy.]

The current custodian for Honest Dollar is Apex Clearing Corporation, a New York Corporation. Apex is a registered broker-dealer that is not affiliated with Honest Advisors or its affiliates.

Honest Dollar is run by Honest Advisors LLC, based in Austin, Texas. Goldman Sachs Asset Management, Honest Advisors and Honest Dollar are all subsidiaries of The Goldman Sachs Group, Inc.

Honest Advisors, LLC, offers an individual retirement account-based savings program designed to enable employees of small- and medium-sized businesses, self-employed individuals, independent contractors and other individuals.

Clients establish a traditional IRA, Roth IRA, a SEP-IRA (Simplified Employee Pension-Individual Retirement Account) if eligible, and appoint Apex Clearing Corp. to custody the IRA assets and provide brokerage services.

Honest Dollar interacts with clients through a software application that’s available through its website and mobile app. The program provides investment advice through the Portfolio Selection Tool at the site, but not in person, over the phone, in live chat, or otherwise.

Honest Advisors uses model portfolios designed by GSAM. The portfolios have asset-weighted expense ratios ranging from 0.09% to 0.13%, up from the 0.07% on previously offered portfolios. The portfolios include passive, non-proprietary exchange-traded funds (ETFs) sourced from multiple unaffiliated providers.

“This increase is due to the addition of ETFs that in certain cases have substantially higher expense ratios than the expense ratios of the ETFs that were available through the Program prior to October 12, 2017. Such higher-expense ETFs have been included in the portfolios along with other ETFs for the purpose of increased diversification,” according to Honest Advisor’s Form ADV.

Automatic SS COLA Adjustments received since 1975

Posted on October 19, 2017 by Editorial Staff -

RIIA Sells RMA Designation to the Investment and Wealth Institute (formerly known as IMCA )

Posted on October 18, 2017 by Kerry Pechter -

Francois Gadenne, the president of the Retirement Income Industry Association, announced this week that the organization is going to end its 10-year run as the leading client-centric organization in the $26 trillion retirement space by selling its RMA professional designation to the Investment and Wealth Institute—the professional organization formerly known as IMCA.

“I was talking to my partner Al Turco at our 10-year gala and we decided that we had succeeded in creating the best designation in retirement income planning, one that started with clients and not products,” said Gadenne, who was born in Lille, France, educated in France and at Northwestern’s Kellogg School of Management in Chicago and made his fortune at the end of the 1990s by selling a dot-com robo-advisor, Rational Investors, Inc., to Standard & Poor’s.

“But in terms of getting our designation on the approved list of all the major distribution companies, we were only doing onesies and twosies and knew it would be a long and tough slog,” he told RIJ yesterday. “So we asked ourselves, ‘Who would be the best choice for a partner if we were going to do a joint venture?’ We made a strategic map and IMCA—now the Investment and Wealth Institute—was the first choice.

“They had reached out to me early last year and asked me to speak at their annual conference in May. I called their CEO, Sean Walters, and said ‘You’re first on our list.’ After a 90-minute conversation, we clicked and it just happened. The Institute is big enough to survive in a cartelized industry, and small enough to grow a lot. They were first on our list because we have a client-focus and so do they.”

RIIA was set up as a 501(c)(6) non-profit, and it owned the intellectual property rights to the RMA, the professional certification that was based on the philosophy that all retirement advice starts with a consideration of the client’s entire “household balance sheet”—i.e., all of the clients’ assets and liabilities, including human capital, social capital and real estate holdings—and ends with a solution that provides the client with a floor income plus exposure to upside growth during retirement.

With the transfer of the rights to the RMA, it will become one of the Institute’s constellation of designations for advisors, which include the Certified Investment Management Analyst and the Certified Private Wealth Advisor. The RMA will become a two-tier program, offering a “light” certificate program for advisors who complete a distance-learning course and a full-blown professional designation for those who complete a more rigorous course.

The Institute has educational partnerships with professors at The Wharton School, Yale and the University of Chicago’s Booth School. On-site classes at one of those business schools would be included in the curriculum of the full-blown RMA, presumably giving it a new level of visibility, prestige and marketability.

RIIA will survive under a new name and with a new mission. It will become the CTRI, which stands for Circle Triangle Rectangle Institute. Gadenne (right) unveiled the “Circle Triangle Rectangle” advisory philosophy at its annual meeting in Salem, Mass., last July.

Some advisory clients, RIIA postulated, merely want advice on investment management alone (Curve); others want their investment advice tailored to the achievement of personal goals and aspirations (Triangle); and others want the advisor to include their entire household balance sheet, not just investments, in a goal-based plan (Rectangle). The advisor’s job is to match the right geometric figure with the right client. (A paper based on this idea, by Gadenne and Patrick Collins, Ph.D., appeared in the July/August issue of Investments and Wealth Monitor, a publication of the Investment and Wealth Institute.)

Those who relied on RIIA as an entrepreneur-friendly, non-denominational nexus for periodic networking and schmoozing will not find CTRI to be the same kind of intellectual wildlife preserve, evidently. “The membership of CTRI will be just institutional members, based on personal relationships with no more than six to 12 CEOs. Memberships will cost $250,000 a year. All members will be board members,” Gadenne said.

“At CTRI, we will be developing a big data technology platform that will allow us not just to data-mine but to ‘concept-mine’ across the research. We’ll create genealogies of research papers and concepts that support sales engagement processes,” Gadenne said. CTRI’s seed money will be the proceeds of the sale of the RMA to the Investment and Wealth Institute.

The institute will also sponsor a “wiki”—a living encyclopedia—of research supporting best practices in retirement income planning. Initially, it will be based on a bibliography assembled by Patrick Collins, an advisor and adjunct professor at the University of San Francisco School of Management. The wiki will be administered by Salem State University in Salem, Mass., with CTRI handling the analytics.

So RIIA’s race is run. As an organization, it had strengths and weaknesses. Both stemmed, as is often the case, from the same basic characteristics. It was both an industry trade group and a consumer-focused group, but not an advocacy group, so it had no obvious funding base.

It mapped all of the existing “silos” of the retirement industry, to an extent never accomplished before, without occupying any single one of them. Its meetings brought together a stimulating cocktail of executives, advisors, lawyers, academics and entrepreneurs.

While RIIA’s accomplishments were the results of a small army of people, its personality and momentum sprang mainly from the passions and contradictions of a single person—Gadenne, whose own career included stints in academia, corporations and start-ups. Now that he and RIIA are moving on to new ventures, the retirement industry may not see anything quite like them again.

A Western & Southern Group income annuity joins Fidelity online platform

Posted on October 18, 2017 by Editorial Staff -

IncomeSource, a single premium immediate annuity underwritten by two Western & Southern Financial Group member companies has been added to selection of annuities on the Fidelity Insurance Network, the online platform where many Americans buy their income annuities. It’s the first Western & Southern annuity to be offered in Fidelity’s product line-up.

IncomeSource is issued by Western-Southern Life Assurance Company or National Integrity Life Insurance Company.

According to a release this week, IncomeSource offers:

An optional annual inflation adjustment of one to five percent per year
Beneficiary designation options
Commutation rights that can provide emergency liquidity
Financial strength. Western & Southern has an A+ (Superior) rating from A.M. Best and an AA (Very Strong) rating from Standard & Poor’s.

Fidelity Insurance Network, established in 1987, offers deferred variable annuities, immediate fixed income annuities, fixed deferred annuities with guaranteed life withdrawal benefits and deferred income annuities.

Guardian, MassMutual, New York Life and The Principal all offer both immediate fixed income annuities and deferred income annuities through the platform. All of the immediate annuities on the platform have an initial minimum premium of $10,000 and all have joint-and-survivor options that allow for 100%, 66 2/3% and 50% continuation to the survivor.

Fidelity Investments has assets under administration of $6.4 trillion, including managed assets of $2.3 trillion as of August 31, 2017.

Retirement research from the CFA Institute etc.

Posted on October 17, 2017 by Editorial Staff -

The tiger-pit known as “sequence” risk. The unscalable challenge of converting defined contribution savings into lifelong income. Palliatives for the mixed blessing of ultra-longevity. A peek at how the natives up north (Canada) and down under (Australia) pay for their retirement.

The CFA Institute has released a list of links to its best and freshest (or almost-fresh) retirement research, which cover the above topics and then some. Unless you’re preoccupied with the text of the latest Republican tax plan, or an annuity prospectus, or the new season of Curb Your Enthusiasm, check them out:

Reducing Sequence Risk Using Trend Following and the CAPE Ratio (Financial Analysts Journal, 2017) Using U.S. equity return data for 1872–2014, this paper shows how sequence risk can be significantly reduced by applying trend-following investment strategies. The authors also show the importance of knowing the CAPE ratio, at the beginning of a decumulation period.

Longevity and Sequencing Risk: Using alternative investments to address pre- and post-retirement issues (Invesco, 2017)
This paper will explore the issues and challenges associated with longevity and sequencing risk, especially in the current market environment, and examine how alternative investments offer investors potential solutions for these risks.
Turning DC Assets Into a Lifetime Paycheck: Evaluating Investment Choices (PIMCO)
In this paper, Stacy Schaus and Ying Gao argue that the best strategy for creating a retirement income stream is for retirees to keep savings in their Defined Contribution plan.
Longevity Risk and Retirement Income – CFA Institute Research Foundation Literature Review (2015)
The authors present a literature survey over the past 50 years on longevity risk and portfolio sustainability. They highlight and deliver key insights on important and emerging themes with the topic areas.
DC Pensions – The Longevity Issue (SSGA, 2017)
This edition of SSGA’s “The Participant” celebrates five years of the magazine with a special issue, which explores how increasing life spans are affecting retirement savers.
Making STRIDEs in Evaluating the Performance of Retirement Solutions (S&P Dow Jones Indices, July 2017)
This paper tests S&P STRIDE’s approach to consumption risk and asset allocation over the period 2003-2016 for hypothetical 2010 retirees by comparing the S&P STRIDE Glide Path 2010 Index Total Return to the average 2010 target date fund (TDF).
Lifetime income solutions for DC pensions (Willis Towers Watson, 2016)
Willis Towers Watson presents their findings on a survey conducted to learn more about what actions employers are taking to address employees’ longevity risk.
How much can retirees spend? The “virtual annuity” approach (Barton Waring & Laurence Siegel)
The authors of this paper propose the “virtual annuity” approach to help determine a retiree’s spending rule.
Optimizing Retirement Income Solutions in Defined Contribution Retirement Plans (SOA, 2016)
This 58-page report aims to help plan sponsors, advisors and retirees achieve their goals by providing them with an analytical framework for evaluating a variety of possible retirement income solutions.
Are Target Date Funds On Target? (QMA)
Jeremy Stempien examines how the probability of success is measured, the sensitivity of income expectations to different return assumptions, and finally considers the outlook for asset class returns.
Designing the Future of TDFs: Improving US retirement outcomes (AB, 2017)
The author delivers insights on an improved glide path design—incorporating a broader set of asset classes with a multi-manager architecture that can potentially reduce risk and build more retirement income.
The Case for “Bonds for Financial Security” (IMCA, 2016)
IMCA explains, Bonds for Financial Security (BFFS) and argues that this single instrument can help investors achieve retirement objectives at lower risk, lower cost, and with greater liquidity and simplicity than traditional portfolios.
Canada: Decumulation, The Next Critical Frontier: Improvements for DC and Capital Accumulation Plans (ACPM, 2017)
This paper explores the concern that the decumulation products and services currently available to individuals may not produce optimal outcomes, while group decumulation options are not broadly available.
Australia: How Safe are Safe Withdrawal Rates in Retirement? (FINSIA, 2016)
This report by Finsia examines the next step in the post-retir
ement or decumulation phase in one’s retirement journey. Surveying the annualized performance of different investments in a number of countries over a period of 112 years.

Honorable Mention

Posted on October 17, 2017 by Editorial Staff -

Stash plans new banking and advice app for early 2018

Stash, the financial services platform, announced a plan to launch mobile-first banking services to help millions of Americans who need support managing their day-to-day money and reaching their dreams of financial security and prosperity. The personalized banking experience will use new technology, data and simple recommendations to lead clients on a path toward healthy financial habits.

Individuals can join the Stash banking services waiting list at www.stashbanking.com.

Core banking features will include:

A savings feature to help clients create customizable short-term and long-term savings goals.
Free FDIC-insured bank accounts with no fees, no minimum balance requirement and free access to the “largest ATM network in the U.S.”
Customized advice.
A “spend and bill tracker” to show clients their current money status, transactions and financial patterns.
“Auto” and “Smart-Save” features to automatically save small amounts, analyze historical spending, and optimize savings.
Access to the “Stash Plan,” a proprietary, long-term financial security plan.
Standard banking features such as bill pay, direct deposit and a Stash debit card.

“The average American pays close to $300 a year in bank fees,” said Ed Robinson, president and co-founder of Stash, in a release. “We’re building our banking services to solve that and bring new tools, coaching and complete transparency to the process.”

The banking app joins the “Invest” and “Retire” functions on the Stash platform gives everyone access to the tools and education needed to save and invest in their financial futures. Clients of Stash’s current Invest and Retire products can build personalized portfolios from a selection of over 40 curated ETFs to build personalized portfolios.

Stash claims more than 2.5 million Stash Learn subscribers and 1.2 million clients. Stash includes Stash Cash Management LLC, Stash Investments LLC, an SEC Registered Investment Adviser and Stash Capital LLC, an SEC Registered Broker Dealer and member of FINRA and SIPC. Based in New York City, it launched in February 2015 by Brandon Krieg and Ed Robinson.

U.S. collective investment trust assets grow at double-digit rate in 2016

Fee sensitivity, the threat of litigation, and increased awareness of collective investment trusts (CITs) are casing many defined benefit and defined contribution plans to increase their use of CITs in their investment portfolios, according to Cerulli Associates, the global research and consulting firm.

“As of 2016, CIT assets were almost $2.8 trillion, which is a major increase from 2011, when assets had yet to cross the $2 trillion mark,” said Christopher Mason, a senior analyst at Cerulli, in a release this week. The 11.6% increase from 2015 to 2016 represented the first year of double-digit year-over-year growth for CITs since 2012.

“CITs often are priced lower as compared to mutual funds of similar strategies,” the Mason said. More important, he added, “The threat of litigation is putting pressure on plan sponsors to ensure that related fees paid reflect the best interest of the plan participants.”

According to the research, 81% of CIT managers perceive consultants to be very knowledgeable about CITs, but only 14% believe that financial advisors are very knowledgeable about the product category.

“Financial advisors’ familiarity with mutual funds, along with marginal differences in cost compared to CITs, cause them to be more apt to turn to mutual funds,” Mason said. Cerulli maintains that as financial advisors become more educated about CITs, the more likely they are to use them in client portfolios.

‘Best Paper’ award goes to David Blanchett

‘The Value of a Gamma-Efficient Portfolio,’ a research paper by David Blanchett, Director of Retirement Research with Morningstar Investment Management and adjunct professor at The American College, has won a ‘Best Paper’ award from the Academy of Financial Services, The American College of Financial Services announced this week.

The paper reviews the concept of “gamma,” a metric designed to quantify the value of advisors’ contributions to client financial decisions. It will be part of the curriculum for the American College’s upcoming Wealth Management Certified Professional (WMCP) designation, which helps advisors apply modern investment theory to client relationships.

The AFS’s ‘Best Paper’ award recognizes authors from a variety of financial planning disciplines that relate to financial planning, including estate planning, insurance, tax accounting aspects of financial planning, investments, and retirement planning.

Ken Stapleton joins MassMutual DB team

To boost support of its defined benefit (DB) pension plans, Massachusetts Mutual Life Insurance Co. (MassMutual) has appointed Ken Stapleton as senior institutional investment consultant to support plan sponsors and financial advisors in the DB space.

Stapleton assumes responsibility for portfolio strategy, asset allocation, risk reduction, investment policy, product selection and day-to-day information and data sharing. MassMutual has $16 billion in DB pension assets under administration and serves 400,000 workers and retirees.

MassMutual, which said it is expanding its support of the DB marketplace in pursuit of growth, recently introduced its PensionSmart Analysis tool, which evaluates a DB plan’s current status, funding level, and service structure.

Earlier this year, MassMutual introduced customized pension yield curves to help plan sponsors measure their pension obligations more accurately.

The appointment of Stapleton gives MassMutual three investment consultants focused on the DB marketplace. Prior to joining MassMutual, Stapleton worked at Keefe, Bruyette and Woods as an institutional equity trader and research analyst. He also worked an investment banker with Ironwood Capital.

He holds B.S. and MBA degrees from the University of Connecticut and FINRA Series 7 and 63 licenses.

Bill Bainbridge named SVP of Product for Voya Annuities and Individual Life

Voya Financial, Inc., has appointed Bill Bainbridge, FSA, MAAA, CERA, as senior vice president and leader of all product development and in-force management for the company’s Annuities and Individual Life businesses. He will report to Carolyn Johnson, chief executive officer, Annuities and Individual Life.

Bainbridge served as vice president of pricing for Voya’s Annuities and Individual Life businesses since November 2016. Previously, he oversaw product development for the company’s Annuities business. He joined Voya as a senior actuarial associate in August 2005. Bainbridge began his career at Buck Consultants as an associate in June 2003.

Bainbridge received bachelor’s degrees in both actuarial science and economics from Lebanon Valley College. He is a fellow of the Society of Actuaries and holds the chartered enterprise risk analyst designation. In 2016, Bainbridge was recognized by LIMRA as a “Rising Star” in the financial services industry.

The Cost of Following a Game Franchise

Posted on October 12, 2017 by Editorial Staff -

OOPs! Medical expenses can eat up retirement income

Posted on October 12, 2017 by Editorial Staff -

Medicare’s high out-of-pocket (OOP) costs will substantially reduce retiree’s income from Social Security benefits and other sources, according to a new working paper from the Center for Retirement Research at Boston College.

Average OOP spending (excluding long-term care) was $4,274 per year in 2014, with approximately two-thirds ($2,965) spent on premiums. In 2014, the average retiree had only 65.7% of his Social Security benefits remaining after OOP spending and only 82.2% of total income.

Nearly one-fifth (18%) of retirees had less than half of their 2014 Social Security income remaining after OOP spending, with 6% of retirees falling below 50% of total income.

Post-OOP benefit ratios increased concurrently with the introduction of Medicare Part D for retirees who lacked prescription drug coverage prior to 2006. This group also saw a small increase after the donut hole began closing in 2010.

With less than two-thirds of their Social Security benefits available for non-medical consumption, and limited income outside of Social Security for much of the elderly population, many retirees likely feel that making ends meet is difficult.

Medicare spending per beneficiary is expected to resume its decades-long rise by the end of the decade, putting more pressure on retirees’ budgets. The CRR researchers used the 2002-2014 Health and Retirement Study to calculate post-OOP benefit ratios, defined as the share of either Social Security benefits or total income available for non-medical spending.

The project decomposes the share of income that is going toward premium payments and services delivered. It examines how these post-OOP benefit ratios differ by age, gender, income, supplemental insurance coverage, and health status.

The project also updates the changes in OOP spending and the post-OOP income ratios that followed the introduction of Medicare Part D prescription drug coverage in 2006 and the closing of the “donut hole” coverage gap in 2010, which decreased OOP costs under Part D for those spending moderate amounts on prescriptions.

Annuity-Friendly Nominee at DOL

Posted on October 12, 2017 by Kerry Pechter -

Donald Trump’s nominee for the top job at the Department of Labor’s Employee Benefits Security Administration will be Preston Rutledge of the Senate Finance Committee staff, according to press reports yesterday. If nominated and approved, he’d replace Phyllis Borzi, who authored the Obama administration’s fiduciary rule.

If the reports about the nomination in PoliticoPro are true, that would be good news to the retirement industry—particularly to asset managers who would like to see the creation of “open multi-employer retirement plans,” or MEPs, and to life insurers who would like to see a lowering of the barriers to annuities in 401(k) plans.

Rutledge is evidently well known, liked and respected in Washington. “It’s important to have a retirement policy expert in that position and he fills the bill,” said Brian Graff, CEO of the American Retirement Association. “He has relationships with the Hill and Labor. He won’t be in a position [to influence legislation] as a regulator. But if he were to get nominated there might get a chance to revisit the MEPs issue.”

“He’s terrific. He’s genuine. He really gets all the big issues. He has relationships with many different aspects of the retirement world,” said Cindy Hounsell, executive director of WiserWomen, a non-profit that provides financial education to women. “He listens to people. He understands the system.”

A former IRS lawyer who is in his early 60s, Rutledge has been senior tax and benefits counsel for the Senate Finance Committee under Chairman Sen. Orrin Hatch (R-UT) since 2011. He’s been instrumental in the writing of two ambitious and far-reaching recent pieces of retirement legislation.

Those were the SAFE (Secure Annuities for Employees) Retirement Act of 2013 and a 2016 reincarnation of SAFE called the Retirement Enhancement and Savings Act (RESA) of 2016. Hatch introduced both of them. RESA came out of the Senate Finance Committee with bipartisan support but didn’t reach the Senate floor before the 114th Congress ended last January.

In a Benefits Brief issued a year ago, lawyers from the Groom Law Group described RESA as having “the potential to alter the retirement landscape.” The legislation, if revived and passed, would:

Permit unrelated employers (i.e., those without so-called “commonality”) to pool their resources by participating in a new type of multiple employer plan, provided certain conditions are met. This would be a way to expand retirement plan coverage to millions of workers at small companies by letting the owners opt into a pooled employer plan. MEPs are also an industry-favored alternative to mandated state-sponsored workplace IRAs, like California’s Secure Choice.
Require employers to provide defined contribution plan participants with an estimate of the amount of monthly annuity income the participant’s balance could produce in retirement (if benefits were received in a single or joint and survivor life annuity).
Create a new fiduciary safe harbor for employers who opt to include a lifetime income investment option in their defined contribution plan. In 2008, DOL published a safe harbor for annuity selection in defined contribution plans, but many view it as unable to provide meaningful relief, particularly given the difficulty in evaluating the financial capability of the insurer.
Make in-plan annuities more portable. RESA would permit participants to make direct trustee-to-trustee transfers (or transfer annuity contracts) of “lifetime income investments” that are no longer authorized to be held as investment options under a qualified defined contribution, 403(b) plan, or governmental 457(b) plan, without regard to any plan restrictions on in-service distributions.

MEPs have been promoted by asset manager State Street Global Advisors. The pooled plans are also championed by the Center for Retirement Initiatives at Georgetown University’s McCourt School of Public Policy, which favors private-sector solutions to the problem that only about half of American workers can contribute to a retirement plan at work.

The Senate Finance Committee is a magnet for donations from many industries, but especially from the FIRE (finance, insurance and real estate) industries. FIRE has been the biggest source of contributions to committee members in the 115^th Congress, with $19.4 million from political action committees and $43.6 million from individuals. Combined, that’s about twice as much as the next most generous industry contributor to committee members.

In an interview videotaped in New York last April by Cammack Retirement at the Defined Contribution Institutional Investors Association public policy meeting, Rutledge was asked about a key concern of 401(k) providers: The possibility of reductions in the limits on tax-deferred contributions to retirement plans.

Rutledge all but dismissed that likelihood. “As a matter of policy, there’s a lot of reluctance to revisit and maybe consider reducing, for instance, the 401(k) contribution limits,” he said. “That would raise a lot of money, but there’s a long-standing commitment to the contribution limits. Most folks don’t want to lower those. But when they open up tax reform, everything is on the table.”

He praised the concept of open MEPs. “The unsung advantage of the open MEP is that you’ve got a professional organization at the center that does all the paper work and deals with the DOL,” he said. “[To incentivize participation by business owners], we added a tax credit of $5,000 for startup costs.

“That bill has voted through the Finance Committee by 26 to nothing. It wasn’t just bipartisan, it was unanimous. We were hopeful that we could attach that to the year-end [2016] funding bill, but didn’t happen. That’s ready to be pulled down and dusted off.”

Regarding the fiduciary rule, Rutledge said, “There are so many other things to work on that there’s not a lot of appetite at Finance to work on fiduciary rule.”

Another Nobel Surprise for Economics

Posted on October 12, 2017 by Robert Shiller -

The winner of this year’s Nobel Memorial Prize in Economic Sciences, Richard Thaler of the University of Chicago, is a controversial choice. Thaler is known for his lifelong pursuit of behavioral economics (and its subfield, behavioral finance), which is the study of economics (and finance) from a psychological perspective. For some in the profession, the idea that psychological research should even be part of economics has generated hostility for years.

Not from me. I find it wonderful that the Nobel Foundation chose Thaler. The economics Nobel has already been awarded to a number of people who can be classified as behavioral economists, including George Akerlof, Robert Fogel, Daniel Kahneman, Elinor Ostrom, and me. With the addition of Thaler (right), we now account for approximately 6% of all Nobel economics prizes ever awarded.

But many in economics and finance still believe that the best way to describe human behavior is to eschew psychology and instead model human behavior as mathematical optimization by separate and relentlessly selfish individuals, subject to budget constraints. Of course, not all economists, or even a majority, are wedded to this view, as evidenced by the fact that both Thaler and I have been elected president, in successive years, of the American Economic Association, the main professional body for economists in the United States. But many of our colleagues unquestionably are. Richard Thaler

I first met Thaler in 1982, when he was a professor at Cornell University. I was visiting Cornell briefly, and he and I took a long walk across the campus together, discovering along the way that we had similar ideas and research goals. For 25 years, starting in 1991, he and I co-organized a series of academic conferences on behavioral economics, under the auspices of the US National Bureau of Economic Research.

Over all those years, however, there has been antagonism—and even what appeared to be real animus—toward our research agenda. Thaler once told me that Merton Miller, who won the economics Nobel in 1990 (he died in 2000), would not even make eye contact when passing him in the hallway at the University of Chicago.

Miller explained his reasoning (if not his behavior) in a widely cited 1986 article called “Behavioral Rationality in Finance.” Miller conceded that sometimes people are victims of psychology, but he insisted that stories about such mistakes are “almost totally irrelevant” to finance. The concluding sentence of his review is widely quoted by his admirers: “That we abstract from all these stories in building our models is not because the stories are uninteresting but because they may be too interesting and thereby distract us from the pervasive market forces that should be our principal concern.”

Stephen A. Ross of MIT, another finance theorist who was a likely future Nobel laureate until he died unexpectedly in March, argued along similar lines. In his 2005 book Neoclassical Finance, he, too, eschewed psychology, preferring to build a “methodology of finance as the implication of the absence of arbitrage.” In other words, we can learn a lot about people’s behavior just from the observation that there are no ten-dollar bills lying around on public sidewalks. However psychologically bent some people are, one can bet that they will pick up the money as soon as they spot it.

Both Miller and Ross made wonderful contributions to financial theory. But their results are not the only descriptions of economic and financial forces that should interest us, and Thaler has been a major contributor to a behavioral research program that has demonstrated this.

For example, in 1981, Thaler and Santa Clara University’s Hersh Shefrin advanced an “economic theory of self-control” that describes economic phenomena in terms of people’s inability to control their impulses. Sure, people have no trouble motivating themselves to pick up a ten-dollar bill that they might find on a sidewalk. There is no self-control issue there. But they will have trouble resisting the impulse to spend it. As a result, most people save too little for their retirement years.

Economists need to know about such mistakes that people repeatedly make. During a long subsequent career, involving work with UCLA’s Shlomo Benartzi and others, Thaler has proposed mechanisms that will, as he and Harvard Law School’s Cass Sunstein put it in their book Nudge, change the “choice architecture” of these decisions. The same people, with the same self-control problems, could be enabled to make better decisions.

Improving people’s saving behavior is not a small or insignificant matter. To some extent, it is a matter of life or death, and, more pervasively, it determines whether we achieve fulfillment and satisfaction in life.

Thaler has shown in his research how to focus economic inquiry more decisively on real and important problems. His research program has been both compassionate and grounded, and he has established a research trajectory for young scholars and social engineers that marks the beginning of a real and enduring scientific revolution. I couldn’t be more pleased for him—or for the profession.

Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance and co-author of Phishing for Phools: The Economics of Manipulation and Deception.

Jackson National VAs Offer Vanguard Funds

Posted on October 12, 2017 by Kerry Pechter -

Funds from America’s most popular mutual fund company are now available on America’s most popular variable annuity contracts.

Jackson National has added ten Vanguard fund options to its new fee-based contract, Perspective Advisory II, as well as to other VAs, like the year-old fee-based Perspective Advisory, and to the latest iterations of its top-selling Perspective II and Elite Access contracts.

Perspective Advisory II, issued September 25, is the third Jackson National contract designed for advisors who earn a fee on VA assets under management rather than taking an up-front commission from the insurer. Jackson National introduced its first fee-based VA, Perspective Advisory, in September 2016 and offered a fee-based investment only VA (IOVA) without living benefits in January of this year.

Jackson was by far the top seller of individual variable annuities in the U.S. in the first half of 2017, with almost $9 billion in overall sales, according to Morningstar. Meanwhile, Vanguard is currently the leader in mutual fund flows—not just in passively managed index funds but also, by a small margin, in actively managed funds.

For the year ending August 2017, Vanguard index funds have net flows of $327.9 billion and its active funds have net flows of $5.53 billion. Vanguard as a fund family now manages $3.07 trillion. Since 1997, its assets under management have grown 12-fold. Jackson National’s top-sellling commissioned VA, Perspective II (seven-year surrender period), had sales of $6.58 billion in the first half of 2017. The New York version of the contract added $533.5 million. The runner-up individual VA contract, AXA’s Structured Capital Strategies, a variable index annuity for accumulation investors, sold $1.8 billion in the first half.

The new Jackson National product gives fee-based advisors—including those who recently switched revenue models in response to the DOL fiduciary rule and those who haven’t sold VAs at all—a chance to offer their clients a contract that, in its commission-paying version, is the most popular VA contract in the U.S.

It remains to be seen whether RIAs (registered investment advisors) and other fee-based advisors will embrace and sell no-commission VAs with living benefits. Investment-only fee-based VAs are popular with RIAs mainly because of their unique tax benefit: tax-deferred growth on virtually any amount of after-tax premium.

As retirement income-generation vehicles, VAs present a more complex value proposition. Compared with fixed income annuities, they provide less guaranteed income but more liquidity. But some advisors wonder—about VAs with living benefits in general, not Jackson National’s in particular—if the effects of fee drag will prevent the separate account assets from growing fast enough to produce steadily rising income in retirement.

Aside from possible market value adjustments on fixed income investments, most fee-based VAs are fully liquid. Because there is no commission, investors aren’t subject to the surrender charges that can discourage variable annuity contract owners from withdrawing more than 10% of their account balance per year for as long as seven years.

The Vanguard funds, which are among some 110 investment options from a wide range of fund companies, include three index funds (Global Bond Market, U.S. Stock Market, and International Stock Market) with current expense ratios of 29 to 39 basis points per year, and seven Vanguard actively managed funds with current expense ratios of 27 to 67 basis points per year. Other available funds carry expense ratios ranging from 26 to 205 basis points per year.

The contract, which has an annual fee of 45 basis points, features four living benefit options: Lifeguard Freedom Flex (max 150 basis points for single life, max 160 basis points for joint), Lifeguard Freedom Net, and LifeGuard Freedom Flex DB; which is designed for legacy planning.

All Lifeguard options include annual roll-ups under certain conditions and different payout percentages at different ages. Deferral bonuses of 5%, 6% and 7% are available for the first 10 years, if no withdrawals are taken. There are also four death benefit options with price points from 20 basis points to 125 basis points per year. LifeGuard Freedom Flex DB offers both a living benefit and death benefit component.

The Vanguard funds available in the Perspective Advisory contracts include:

JNL/Vanguard Capital Growth Fund
JNL/Vanguard Equity Income Fund
JNL/Vanguard International Fund
JNL/Vanguard Small Company Growth
JNL/Vanguard Global Bond Market Index Fund
JNL/Vanguard International Stock Market Index Fund
JNL/Vanguard U.S. Stock Market Index Fund
JNL/Vanguard Moderate Allocation Fund
JNL/Vanguard Moderate Growth Allocation Fund
JNL/Vanguard Growth Allocation Fund

Financial Engines adds college and health planning modules for participants

Posted on October 12, 2017 by Editorial Staff -

As part of its financial wellness initiative for plan sponsor clients, Financial Engines has added a College Expense Planner and a Retirement Healthcare Expense Planner to its advisory services platform for 401(k) plan participants, the publicly-held investment management and advisory firm announced this week.

The Financial Engines College Expense Planner enables people to estimate how much they will need to save for their children’s college expenses and how close they are to their goal. The planner incorporates third-party tuition cost growth estimates for public and private colleges and a variety of portfolio forecasting options.

The Financial Engines Retirement Healthcare Expense Planner enables users to estimate what they might need to pay for Medicare premiums and out-of-pocket healthcare expenses in retirement. The planner leverages Financial Engines’ partnership with HealthView, a Danvers, MA-based provider of healthcare cost-projection software. With the planner, users receive a location-specific estimate for how much they can expect to pay for healthcare services in retirement.

DOL delay will help annuity sales in 2018: LIMRA

Posted on October 12, 2017 by Editorial Staff -

LIMRA Secure Retirement Institute has revised its annuity sales forecast for 2018, following a delay in the Department of Labor fiduciary rule (DOL rule).

Today, LIMRA Secure Retirement Institute predicts a five percent increase of overall annuity sales in U.S. in 2018. Variable annuity (VA) sales are still expected to decline in 2018 (0-5 percent), but the decline is less than originally thought (10-15 percent), compared with sales in 2017. The Institute expects fixed annuity sales to increase 5-10 percent in 2018, an improvement over the expected 0-5 percent decline expected in 2017.

Indexed Annuities to Drive Increase in Fixed Annuity Sales
LIMRA Secure Retirement Institute forecasts that sales of fixed annuities will increase across all product lines: indexed, fixed-rate deferred and income annuities. Because of the delay in the DOL rule, the Institute projects 2018 indexed annuity sales will bounce back from the decline seen early in 2017 to reach the near record levels ($60 billion+) of 2016.

The rule would have had significantly disrupted the independent marketing organization (IMO) channel, which represents a large portion of the indexed annuity sales. With the DOL rule delayed, the Institute projects indexed annuity sales to rebound five to ten percent in 2018, compared with 2017 sales results.

Limra annuity forecast

Improvement in Variable Annuity Sales
Variable annuity sales have declined for the past five years, in part because companies have been carefully managing their VA sales volume. The decline of VA sales accelerated once DOL fiduciary rule was published in 2015. The Institute believes the delay in implementing the DOL rule, and thus the best interest contract requirements, will reduce some of the pressure on the VA market in 2018, and help improve sales.

While there will be positive progress, the Institute still forecasts a decline in 2018 VA sales, albeit smaller than predicted when the rule was expected to go into effect on Jan. 1, 2018. Overall annuity sales experienced declines in 2017, which were predicted to continue in 2018.

Fidelity’s global unit to experiment with variable fees

Posted on October 5, 2017 by Editorial Staff -

Fidelity International, a global unit of Fidelity Investments, has introduced a variable investment management fee, which will fluctuate when funds outperform or underperform their benchmarks, across its entire outside-the-U.S. equity investment offerings, IPE.com reported this week.

A range of share classes for Fidelity equity funds will have a reduced base annual management charge and a “fulcrum fee” that is “symmetrically linked” to fund performance. The annual management fee will rise if a fund outperforms its benchmark index, but will fall if the fund underperforms.

The new share class is expected to launch in the first quarter of 2018, subject to discussions with local regulators, said Fidelity International president Brian Conroy. For more on this fee structure, which is practiced at Orbis Investments, click here.

Fidelity International runs roughly $894bn (€760.4bn) in equity assets, all of which will become eligible for the new charge structure under the company’s plans. The group runs more than €2trn worldwide across all asset classes according to IPE’s Top 400 Asset Managers survey.

A fund could post a gain or loss and it wouldn’t matter—what matters is whether the fund beats or lags its benchmark, according to Dominic Rossi, global chief investment officer for equities at Fidelity International. If a fund lost money but beat its benchmark it would raise its fee, and if the fund made money but underperformed its index it would lower its fee.

Rossi added that a small number of funds may alter their benchmarks in order to ensure they were verifiable and appropriate for the new fee structure, but emphasized that such changes would be “minimal.”

In a press release, Fidelity said: “Where we deliver outperformance net of fees we will share in the upside and in the case that clients experience only benchmark level performance or below, they will see lower fee levels under this new model. The fee that clients will pay will sit within a range and will be subject to a pre-determined cap (maximum) and floor (minimum).”

The exact level of fees, as well as the floor and ceiling, would be agreed with fund boards, distributors and regulators in the next few months, he said, adding that the new fee structure would “more closely align the performance of our business with the performance of our clients’ portfolios.”

Fidelity also said it would pass on the costs of investment research to clients under the European Union’s new market rules, called Mifid II, due to go live in January, bucking the trend set by many regional peers who have made a decision to absorb the costs, according to a report in gamesworlditalia.com.

Why most 401(k)s don’t offer in-plan annuities

Posted on October 5, 2017 by Editorial Staff -

Many decumulation mavens would like to see inexpensive, gender-neutral annuities added to 401(k) investment lineups, even though most plan sponsors don’t want them. But do most people know why most401(k) plans–the most prevalent retirement savings plan in America–don’t offer any income option?

A new white paper from TIAA called “Closing the Guarantee Gap” answers that question.

The 401(k) concept appeared in the 1980s as a type of profit-sharing plan, not as a pension plan, the paper explains. Since the Employee Retirement Income Security Act, or ERISA, requires only pension plans to offer income options, 401(k)s didn’t have to.

Then, in the early 1990s, the Department of Labor, in response to an annuity provider default, tightened regulation of annuities in retirement plans. Rather than regulate providers more closely, it put the burden for choosing a safe annuity provider on plan fiduciaries, making them more annuity-shy.

Until the turn of the century, money purchase plans, which are pensions and did offer annuities, competed with 401(k)s. But in 2001, the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) “equalized the deduction limit for money purchase plans and 401(k) profit-sharing plans at 25% of compensation. Almost immediately, corporate employers abandoned money purchase plans for 401(k) profit-sharing plans,” said the TIAA white paper.

The 401(k) rapidly emerged as America’s primary retirement savings vehicle. But because these plans are, technically, profit-sharing plans and not pensions per se, labor law doesn’t require them to include in-plan annuity options. In fact, as noted above, the DOL has made plan sponsors more wary of them.

In the white paper, TIAA identifies three major weaknesses in the U.S. retirement system:

Coverage Gap. Not enough Americans have access to a workplace retirement plan;
Savings Gap. Even if they have access to a retirement plan, many Americans aren’t saving enough; and
Guarantee Gap. Few plans provide resources such as annuities to guarantee savings will last throughout retirement.

To solve the Guarantee Gap, TIAA recommends the following actions:

Simplify the safe harbor for employers selecting an annuity provider
2. Increase the portability of annuity contracts
3. Broaden the qualified default investment alternative (QDIA) regulations so that annuities can become default investments
4. Provide retirement savings plan participants with an annual lifetime income disclosure statement
5. Give participants more access to flexible income distribution options
6. Provide favorable tax treatment for annuity income in retirement

Threats to broker-dealer model: It’s more than DOL

Posted on October 5, 2017 by Editorial Staff -

The broker/dealer (B/D) model faces several threats from current industry trends, according to the latest research from Cerulli Associates, a global research and consulting firm.

“The shift from commissions to fee-based pricing is one of the most important trends in the wealth management industry,” said Bing Waldert, managing director of U.S. research at Cerulli, in a release. “Even if the DOL conflict of interest rule is ultimately diluted, it has reinforced [this] shift.

“The B/D model faces competitive threats in addition to those imposed by regulation. Chief among these is the growth of the independent RIA (registered investment advisor) model. Advisors are increasingly choosing to strike out on their own, doing business under their own RIA.

“Since the financial crisis, there has been growing consumer awareness of the conflicts of interest inherent in the wealth management industry, creating another competitive threat for B/Ds.

“When Cerulli examines market share shifts, the focus has always been the shift of advisors away from employee-based B/Ds to more independent models. However, some portion of the RIA channel’s growth can be attributed to investors choosing to do business with an independent advisor with fiduciary positioning.

“In order to enhance their credibility with advisors, B/Ds must reconsider their value proposition as an advisor service organization. It is important for B/Ds to help advisors further their career goals, because if advisor recruiting slows, organic growth becomes more important.”

These findings and more are from the October 2017 issue of The Cerulli Edge – U.S. Edition, which explores various metrics that firms use to gauge their success, including data-driven technology, formalized goals, and re-evaluating the role of B/Ds.

In other research published this month, Cerulli found that outsourcing model portfolios is most common among independent broker/dealer (IBD) advisors at 43%.

“The Department of Labor’s Conflict of Interest Rule has raised standards for investment due diligence and documentation; consequently, advisors making their own investment decisions increases potential liability for broker/dealers (B/Ds),” said Kenton Shirk, director of Cerulli’s U.S. Intermediary practice, in a release.

“In response to this growing concern of liability, B/Ds seek to refocus advisors on home-office discretionary programs.” To influence an advisor’s investment decisions, B/Ds and asset managers need to understand drivers behind model portfolio use and outsourcing from the advisor’s perspective.

Cerulli compared the portfolio construction process for advisors affiliated with wirehouses, IBDs, and independent registered investment advisors (RIAs). The advisors were segmented across three portfolio construction process categories: Custom portfolios, practice models and outsourced models.

“Use of model portfolios is prevalent across all three channels with at least 74% of advisors using either practice models or outsourced models,” said Shirk. “Outsourcing model portfolios to a home office or third-party provider is most prevalent among IBD advisors (43%), while RIAs were found to be the least likely to outsource (12%).”

“Outsourcing is most common among IBD advisors, likely due to the advisors’ role as both a financial advisor and a business owner, accompanied by their propensity to be financial-planning-oriented,” said Shirk. “These attributes create time constraints, making it essential for IBD advisors to turn to outsourcing.”

Despite steady advisor productivity levels, IBD advisors who outsource tend to have lower levels of assets under management (AUM) per total practice headcount compared to those who build custom portfolios or practice models.

“This suggests that IBD advisors who outsource tend to struggle more to build operational scale even though they outsource a core function with the intent of increasing capacity,” Shirk explained. “In turn, this implies that they may outsource to sustain a higher volume of lower-balance clients.”

Don’t Mess Up a Good Thing

Posted on October 4, 2017 by Kerry Pechter -

One of the most intriguing consequences of the Department of Labor’s fiduciary rule (the Obama administration version) has been the introduction of so-called fee-based or no-commission versions of one of the best-selling insurance products: fixed indexed annuities (FIAs).

The fee-based versions differ from commission-paying FIAs in important ways. The cost of distribution (i.e., agent commissions) doesn’t get built into the product’s interest-crediting formulas, so they offer the end-client more attractive interest-crediting terms.

Fee-based FIAs also enable Registered Investment Advisors (and the investment advisor representatives, or IARs, who work for them) to sell FIAs to IRA clients without having to comply with the DOL’s “best interest contract exemption,” or BICE, which singles out the commissioned-based sales of indexed annuities, variable annuities, and mutual funds to IRA clients for tighter regulation.

With their brokers migrating from a commission-based sales model to fee-based advice model to avoid the BICE, banks and brokerages have asked life insurers to create more fee-based FIAs. Eight life insurers have so far offered up 15 products, according to looktowink.com, the indexed product data shop.

But here’s the problem. Despite their improved value propositions, which in theory should make fee-based FIAs more appealing than ever to investors, sales have been negligible. In the second quarter of this year, sales were $22.48 million, or just 0.15% of total FIA sales in the quarter, said Sheryl Moore, CEO of Wink and Moore Market Intelligence.

With commissions gone, brokers-turned-IARs who used to sell FIAs—and who insurers hope will keep doing so—no longer have any special incentive to do so. Fee-based advisors can levy a typical 1% managed account fee on the value of the FIA contract, but then fee-based FIAs might cost as much as commission-based FIAs. A big part of their advantage for investors would go away.

What people are saying

How much compensation for FIAs is “reasonable”? Insurance agents and brokers justified high FIA commissions from manufacturers because the products’ complexities were hard to master or explain to clients. But do FIAs entail enough ongoing labor to justify charging the client one percent per year?

“It’s an interesting struggle,” said Ron Grensteiner, president of Eagle Life. “The FIA isn’t a high maintenance product. Although you have the opportunity to allocate to a fixed account or to an annual point-to-point crediting method, it’s pretty static for the most part. So to charge a fee on something that’s low maintenance would be strange.”

Eagle Life is one of the latest insurers to offer a no-commission FIA. The subsidiary of American Equity distributes insurance products through banks and brokerages. “Several [bank and broker-dealer] customers have been asking for this product,” Jeff Varisco, senior vice president at Eagle Life, told RIJ recently.

The new product is called the Eagle Advisory 8. It has an eight-year surrender period, a lifetime income rider and interest crediting linked to the performance of the S&P 500 Index. With no commission factored into its pricing formula, it has higher crediting rates or caps than a comparable commission-based product.

“We strip the commission out of the product and the difference goes into the option budget. Whatever that will buy in terms of caps and commission rates is what we offer on this product,” Varisco said.

Sheryl Moore, whose firm collects and distributes sales and product data on indexed insurance products, is skeptical of the sales potential of fee-based FIAs. Charging a one percent managed account fee on a guaranteed, low-maintenance product like an FIA doesn’t make much sense to her.

“How can one justify an asset management fee on a product that has no market risk? I understand implications of the DOL’s rule on annuity product development, but this still has me scratching my head,” she said in an interview. Commissions drove the sales of FIAs by insurance-only agents, and they won’t sell them without commissions, she added. Nor does she think that advisors who have never sold FIAs will leave their comfort zones to sell something unfamiliar.

Tom O’Shea, an analyst at Cerulli Associates, told RIJ, “Some institutions, those that feel it’s appropriate, are counting the annuity assets toward total AUM [assets under management]. Other RIAs or broker-dealers have decided that including the FIA specifically under AUM doesn’t make sense, and they’re not doing it.

“But I don’t see many firms charging one percent [on the money in the FIA]. In our conversations with firms, they were talking about a lower amount,” he added. “At firms that run bond ladders, for comparison, they charge 25 to 30 basis points on those assets, which is similar to the trail on an annuity.”

But brokerage executives feel differently. At Raymond James, fee-based advisors will be assessing their usual managed account fee on the value of fee-based FIAs, according to Scott Stolz, senior vice president, Private Client Group Investment Products.

“The annuity will be another asset within the fee-based account. It, like the other assets, will be billed on its value. Some firms are struggling with this. They are wondering how they are going to justify an ongoing fee on a buy and hold investment like an annuity,” Stolz told RIJ recently.

Stolz rejects the idea that an annuity should carry a lower charge because it requires so little maintenance. In my view, this [idea] comes from the regulatory focus to look at the appropriateness of a fee-based account based solely on the number of transactions. There needs to be a shift in thinking to understand that the fee is for ongoing advice.

“You don’t have to do a transaction to constitute advice. In fact, that approach can encourage advisors to recommend a transaction even if it’s not necessary. Of course, we as an industry have to do a much better job of documenting the ongoing advice. Absent this documentation, the regulators can only look at transactions.”

At Great American Life, which issued its first no-commission FIA in mid-2016 and distributes it through Raymond James, Commonwealth, and other brokerages, national sales vice president Joe Maringer said that attitudes toward charging a full management fee on FIAs varies from firm to firm. to agree with Stolz (whose company distributes Great American’s fee-based FIAs).

When advisors say they can’t justify a full managed account fee to a guaranteed asset—and therefore may not carry his product at all—Maringer urges them to think of the FIA as working in synergy with the whole portfolio, potentially lifting its overall returns relative to a similar portfolio with bonds as its safe asset.

Every broker-dealer has its own distinct compensation model. For Raymond James, fee-based advisors charge a level fee across all assets if they want to avoid using the best interest exemption (and all the documentation it entails). Other brokerages, however, allow advisors to charge reduced fee on safe or low-turnover assets.

“If you have the ability to charge different fees on different assets, you should consider that,” Maringer told RIJ. “But if you currently charge your regular management fee on cash or intermediate bond funds, you should also be able to charge it on a fee-based fixed indexed annuity that may provide the client a better overall result.”

Gary Baker, the president of Cannex, the annuity data company, has for years been looking for a resolution to the conflict of interest between fee-based advisors and income annuities, perhaps by allowing advisors to levy a small fee on the annuity value even after the purchase premium leaves the client’s managed account and goes to the general account of an insurer. He sees the recent introduction of fee-based FIAs as indicative of an experimentation period.

“The bigger issue is whether or not fee-based annuities will ever take off. It’s been tried in the past and carriers are trying again due to the Department of Labor. Fee-based compensation has been used primarily by RIAs or CFPs. These advisors have traditionally stayed away from selling any type of annuity–not because of the commission structure, but due to the fundamental belief that they can better manage (and re-deploy) investments depending upon the changing needs of each client.”

“My feeling is that carriers are looking to test a number of product variations/options to see where distributors end up gravitating toward based on various paths around and through the DOL rule. It now looks like this behavior will be extended for another 18 months.”

“Several of our customers have said that they believe fee-based sales is really the way that all annuity sales will go, and that commissions will go away completely,” Varisco told RIJ. “Some customers believe that we’ll always have commissions. But they all see a need for fee-based products because of the push toward fee-based advisor sales.”

“Jeff is speaking from the Eagle Life perspective,” Grensteiner said, to distinguish the difference in distribution channels between the subsidiary and its parent. “American Equity’s sales are still through [independent insurance] agents, and they still want and need commission-based products.”

Stash plans new banking and advice app for early 2018

U.S. collective investment trust assets grow at double-digit rate in 2016

‘Best Paper’ award goes to David Blanchett

Ken Stapleton joins MassMutual DB team

Bill Bainbridge named SVP of Product for Voya Annuities and Individual Life

Data Connection

Lists*