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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.  

© 2017 RIJ Publishing LLC. All rights reserved.

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.   

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. 

© 2017 RIJ Publishing LLC. All rights reserved.

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.

© 2017 RIJ Publishing LLC. All rights reserved.

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

© 2017 RIJ Publishing LLC. All rights reserved. 

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.”

© 2017 Cerulli Associates. Used with permission.

Total US retirement assets—which can also be thought of as part of the world’s outstanding financial liabilities—were $26.6 trillion as of June 30, 2017, up 1.9% from March 31, 2017. Retirement assets accounted for 34% of all household financial assets in the United States at the end of June 2017, according to the Investment Company Institute.

Much of this wealth is concentrated among a relative few. The wealthiest one percent of Americans owns 43% of U.S. financial assets, the top five percent (including the top one percent) own 73%, and the bottom 80% share only five percent of financial wealth, according to G. William Domhoff of the University of California at Santa Cruz.

Retirement assets generally rose in the second quarter of 2017.

• Assets in individual retirement accounts (IRAs) totaled $8.4 trillion at the end of the second quarter of 2017, an increase of 2.3% from the end of the first quarter.
• Defined contribution (DC) plan assets rose 2.2% in the second quarter of 2017 to $7.5 trillion.
• Government defined benefit (DB) plans (including federal, state, and local government plans) held $5.7 trillion in assets as of the end of June, a 1.5% increase from the end of March
• Private-sector DB plans held $3.0 trillion in assets at the end of the second quarter of 2017
• Annuity reserves outside of retirement accounts were $2.1 trillion

Defined contribution plans

Americans held $7.5 trillion in all employer-based DC retirement plans on June 30, 2017, of which $5.1 trillion was held in 401(k) plans. In addition to 401(k) plans, at the end of the second quarter, $575 billion was held in other private-sector DC plans, $949 billion in 403(b) plans, $297 billion in 457 plans, and $526 billion in the Federal Employees Retirement System’s Thrift Savings Plan (TSP).

Mutual funds managed $3.3 trillion, or 65%, of assets held in 401(k) plans at the end of June 2017. With nearly $2.0 trillion, equity funds were the most common type of funds held in 401(k) plans, followed by $918 billion in hybrid funds, which include target date funds.

Individual Retirement Accounts

IRAs held $8.4 trillion in assets at the end of the second quarter of 2017. Forty-eight percent of IRA assets, or $4.0 trillion, was invested in mutual funds. With $2.2 trillion, equity funds were the most common type of funds held in IRAs, followed by $884 billion in hybrid funds.

Other developments

Target date mutual fund assets grew 4.8% in the second quarter, topping $1 trillion at the end of June 2017. Retirement accounts held the bulk of target date mutual fund assets. Eighty-seven% of these assets were held through DC plans (67%) and IRAs (20%).

© 2017 RIJ Publishing LLC. All rights reserved.

Income earned from the sale of annuities at bank holding companies hit $1.59 billion in first half of 2017, up 4.4% from $1.52 billion in the first half of 2016, according to the Michael White Bank Annuity Fee Income Report.

Second-quarter 2017 annuity commissions rose to $797.3 million, up 4.7% from $761.4 million earned in the second quarter of 2016, but up only 1.1% from $788.5 million in first quarter 2017.

Wells Fargo & Company (CA), Morgan Stanley (NY), and UBS Americas Holding (NY) led all bank holding companies in first half 2017, with $380 million, $302 million and $174.7 million in annuity commission income, respectively.

Among BHCs with assets between $1 billion and $10 billion, leaders included First Command Financial Services (TX), Wesbanco, Inc. (WV), and First Commonwealth Financial Corporation (PA).

The MWA report benchmarks the banking industry’s annuity fee income each quarter. It uses data from all 5,787 commercial banks, savings banks and savings associations (thrifts), and 612 top-tier bank (and S&L) holding companies (collectively, BHCs) with over $1 billion in consolidated assets as of June 30, 2017. Insurance companies have been excluded.

Of the 612 BHCs, 286 or 46.7% participated in annuity sales activities during first half 2017. Their $1.59 billion in annuity commissions and fees constituted 17.5% of their total mutual fund and annuity income of $7.29 billion and 35.4% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage income) of $4.48 billion.

Of the 5,787 banks, 792 or 13.7% participated in first-half annuity sales activities. Those participating banks earned $379.8 million in annuity commissions or 23.9% of the banking industry’s total annuity fee income; their annuity income production was down 10.5% from $424.3 million in first half 2016.

Of 286 large top-tier BHCs reporting annuity fee income in first half 2017, 182 or 63.6% are on track to earn at least $250,000 this year,” said Michael White, president of MWA, in a release. “Of those 182, only 54 BHCs or 29.7% achieved double-digit growth or greater in annuity fee income for the quarter.

“That’s a decrease of nearly 13 percentage points from first half 2016, when 77 institutions or 42.5% of 181 BHCs were on track to earn at least $250,000 in annuity fee income and achieved double-digit growth or greater. Over one-half of the 182 BHCs saw declines in their annuity revenue, with nearly 40% of those experiencing double-digit declines.”

Nearly seven in ten (69.6%) of BHCs with over $10 billion in assets earned first-half annuity commissions of $1.53 billion, constituting 96.6% of total annuity commissions reported by BHCs. That was an increase of 5.6% from $1.45 billion in annuity fee income in first half 2016.

Among this asset class of largest BHCs in the first half, annuity commissions made up 17.2% of their total mutual fund and annuity income of $8.93 billion and 37.6% of their total insurance sales volume of $4.08 billion.

BHCs with assets between $1 billion and $10 billion recorded a 20.7% decline in annuity fee income, falling to $52.8 million in first half 2017 from $66.6 million in first half 2016. Those fees accounted for 13.2% of their total insurance sales income of $422.5 million.

Small community banks with assets less than $1 billion were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Leaders among bank proxies for small BHCs were First Federal Bank of Louisiana (LA), The Security National Bank of Sioux City, Iowa (IA), The Citizens National Bank of Bluffton (OH), Bank Midwest (IA), and Savers Co-operative Bank (MA).

These banks with less than $1 billion in assets generated $25.8 million in annuity commissions in first half 2017, down 15.5% from $30.6 million in first half 2016. Only 10.0% of banks this size engaged in annuity sales activities, which was the lowest participation rate among all asset classes. Among these proxy banks, annuity commissions constituted 17.9% of total insurance sales volume of $144.6 million.

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 4.9% in first half of 2017. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 13.0% of noninterest income.

© 2017 RIJ Publishing LLC. All rights reserved.

OneAmerica elevates web platform for tax-exempt retirement plans

OneAmerica has launched a new website (Tax-Exempt Center of Excellence) where plan sponsors can access educational resources and thought leadership news within the tax-exempt marketplace and get help in retirement planning. OneAmerica launched a similar tax-exempt site in 2016 for financial professionals.

The tax-exempt segment [403(b) plans] of the retirement industry accounts for about a third of OneAmerica’s book of retirement business, and 40% of new business for the companies of OneAmerica. The company has been serving that segment since the mid-1960s.  

OneAmerica is the marketing name for all OneAmerica companies. Their products are issued and underwritten by OneAmerica’s American United Life Insurance Company (AUL) unit. Two OneAmerica companies, McCready and Keene, Inc. and OneAmerica Retirement Services LLC, provide administrative and recordkeeping services. They are not broker/dealers or investment advisors.

Keshavan joins Voya as CIO

Santhosh Keshavan has been appointed Chief Information Officer (CIO) of Voya Financial Inc., effective September 25. Based in Windsor, CT., he reports to Maggie Parent, Voya’s EVP, Technology, Innovation and Operation.  

Previously, Keshavan served as CIO for Core Banking at Regions Financial, a U.S. bank-holding company based in Alabama. He has also held senior information technology positions at Fidelity Investments and SunGard.

Keshavan studied computer science at the University of Mysore in India and holds an MBA in Information Systems from the University of Alabama at Birmingham.

Home equity of seniors nears $6.5 trillion

Homeowners ages 62 and older in the U.S. saw their collective home equity increase 2.4% in the second quarter of 2017, to $6.42 trillion from $6.27 trillion in Q1 2017, the National Reverse Mortgage Lenders Association (NRMLA) reported this week.

The growth in housing wealth for retirement-aged homeowners was driven by an estimated 2.1%, or $162 billion, improvement in senior home values, and offset by a 0.8% increase of senior-held mortgage debt that equaled $12 billion, according to the NRMLA/RiskSpan Reverse Mortgage Market Index (RMMI).

The RMMI, which measures home equity held by older homeowners each quarter, rose to 230.17 in Q2 2017, another all-time high since the index was first published in 2000.

A 2015 research paper from the Ohio State University, Aging in Place: Analyzing the Use of Reverse Mortgages to Preserve Independent Living, shows that 14% of reverse mortgage borrowers took out the loan to pay ongoing health or disability expenses.

Real estate income fund pays third-quarter dividend

Bluerock’s Total Income+ Real Estate Fund has paid a third quarter distribution of $0.3882 per share, or 1.31% for the quarter, based on the share price of $29.58 for shareholders of record as of September 27, 2017 (A-shares). This distribution amount represents an annualized distribution rate of 5.25% based on the current share price.

Net assets under management for TI+ are approximately $780 million. Recent TI+ investments include contributions to seven institutional, private equity investments, including: Morgan Stanley, Principal, Invesco, and UBS.

TI+ currently maintains positions in 19 private equity real estate investments, with underlying assets valued at more than $144 billion (holdings are subject to change at any time and should not be considered investment advice).

TI+ aims to provide current income, capital appreciation, low correlation and low volatility relative to the broader markets. Since its inception in 2012, TI+ has generated higher risk-adjusted returns than major stock, bond and public REIT indexes, “while providing investors with access to institutional, private equity real estate previously unavailable to individual investors,” according to a release. 

New York Life announces new president of MainStay Funds

Kirk Lehneis has been appointed president of MainStay Funds and Chief Operating Officer of New York Life Investment Management, the global asset management business of New York Life, according to a news release this week.

Prudential in $1.3 billion pension risk transfer deal with International Paper

In another in a series of pension risk transfer (PRT) deals, Prudential Insurance has sold a group annuity contract to International Paper that will cover the paper manufacturer’s $1.3 billion in pension obligations to roughly 45,000 retirees and beneficiaries. 

The agreement with International Paper follows several other prominent Prudential PRTs, including those with General Motors, Verizon, Motorola, Bristol-Myers Squibb, The Hartford, Kimberly-Clark and JCPenney. 

Craddock named CRO at Mass Mutual

Massachusetts Mutual Life Insurance Company (MassMutual) has appointed Geoffrey J. Craddock as Chief Risk Officer, effective immediately.  He reports directly to Chairman, President and CEO Roger W. Crandall and joins MassMutual from its OppenheimerFunds, Inc. asset management affiliate.

Craddock replaces Brad Hoffman, who held the CRO position on an interim basis after Elizabeth A. Ward became Chief Financial Officer. As CRO, Craddock will be responsible for the Enterprise Risk Management function. Hoffman will continue to be a part of MassMutual’s Enterprise Risk Management team, reporting to Craddock.

Craddock began his career in the 1980s in a range of trading and brokerage positions with various investment banks in Europe, including Charterhouse Bank; Banque Indosuez; Donaldson, Lufkin & Jenrette; Paine Webber, and Phillips & Drew.

He joined OppenheimerFunds in 2008 as Director of Risk Management and was appointed OppenheimerFunds’ Chief Risk Officer in 2010. Before that, Craddock was Global Head of Market Risk Management for Canadian Imperial Bank of Commerce (CIBC). He holds an MBA from Cranfield School of Management and a BA/MA from Magdalene College, Cambridge, both in the UK. 

Firms partner to integrate 401(k)s with health savings accounts

Ubiquity Retirement + Savings, which provides 401(k) plans to small businesses on a flat-fee basis, will partner with HealthEquity, Inc., a large health savings account (HSA) non-bank custodian, to encourage employers and their employees to coordinate their contributions to both HSAs and 401(k)s.

“While 401(k)s and HSAs have benefited savers separately over the last several years, the market has failed, to this point, to produce a viable combination of the two accounts that can be easily accessed and managed by small businesses,” a press release from the two companies said.

Ubiquity and HealthEquity will offer contribution and investment strategies to employers while enabling employees to see their 401(k) and HSA balances from either platform. Ubiquity Retirement + Savings, founded in 1999, is headquartered in San Francisco with satellite offices from coast to coast.

© 2017 RIJ Publishing LLC. All rights reserved.