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OOPs! Medical expenses can eat up retirement income
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.
© 2017 RIJ Publishing LLC. All rights reserved.
Annuity-Friendly Nominee at DOL
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 115th 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.”
© 2016 RIJ Publishing LLC. All rights reserved.
Another Nobel Surprise for Economics
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.
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.
© 2017 Project Syndicate.
Jackson National VAs Offer Vanguard Funds
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
© 2017 RIJ Publishing LLC. All rights reserved.
Financial Engines adds college and health planning modules for participants
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.
DOL delay will help annuity sales in 2018: LIMRA
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’s global unit to experiment with variable fees
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.
Why most 401(k)s don’t offer in-plan annuities
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.
Threats to broker-dealer model: It’s more than DOL
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.
Don’t Mess Up a Good Thing
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.”
© 2017 RIJ Publishing LLC. All rights reserved.
Deja´ Voodoo
Having failed to “repeal and replace” the 2010 Affordable Care Act (“Obamacare”), US President Donald Trump’s administration and the Republican congressional majority have now moved on to tax reform. Eight months after assuming office, the administration has been able to offer only an outline of what it has in mind. But what we know is enough to feel a deep sense of alarm.
Tax policy should reflect a country’s values and address its problems. And today, the United States—and much of the world—confronts four central problems: widening income inequality, growing job insecurity, climate change, and anemic productivity growth. America faces, in addition, the need to rebuild its decaying infrastructure and strengthen its underperforming primary and secondary education system.
But what Trump and the Republicans are offering in response to these challenges is a tax plan that provides the overwhelming share of benefits not to the middle class—a large proportion of which may actually pay more taxes—but to America’s millionaires and billionaires. If inequality was a problem before, enacting the Republicans’ proposed tax reform will make it much worse.
Corporations and businesses will be among the big beneficiaries, a bias justified on the grounds that this will stimulate the economy. But Republicans, of all people, should understand that incentives matter: it would be far better to reduce taxes for those companies that invest in America and create jobs, and increase taxes for those that don’t.
After all, it is not as if America’s large corporations were starved for cash; they are sitting on a couple of trillion dollars. And the lack of investment is not because profits, either before or after tax, are too low; after-tax corporate profits as a share of GDP have almost tripled in the last 30 years.
Indeed, with incremental investment largely financed by debt, and interest payments being tax-deductible, the corporate tax lowers the cost of capital and the returns to investment commensurately. Thus, neither theory nor evidence suggests that the Republicans’ proposed corporate tax giveaway will increase investment or employment.
The Republicans also dream of a territorial tax system, whereby American corporations are taxed only on the income they generate in the US. But this would only reduce revenue and further encourage American companies to shift production to low-tax jurisdictions. A race to the bottom on corporate taxation can be prevented only by imposing a minimum rate on any corporation that engages in business in the US.
America’s states and municipalities are responsible for education and large parts of the country’s health and welfare system. And state income taxes are the best way to introduce a modicum of progressivity at the subnational level: States without an income tax typically rely on regressive sales taxes, which impose a heavy burden on the poor and working people. It is thus perhaps no surprise that the Trump administration, staffed by plutocrats who are indifferent to inequality, should want to eliminate the deductibility of state income taxes from federal taxation, encouraging states to shift toward sales taxes.
Addressing the panoply of other problems confronting the US will require more federal revenues, not less. Increases in standards of living, for example, are the result of technological innovation, which in turn depends on basic research. But federal government support of research as a percentage of GDP is now at a level comparable to what it was 60 years ago.
While Trump the candidate criticized the growth of US national debt, he now proposes tax cuts that would add trillions to the debt in just the next ten years—not the “only” $1.5 trillion that Republicans claim would be added, thanks to some growth miracle that leads to more tax revenues. Yet the key lesson of Ronald Reagan’s “voodoo” supply-side economics has not changed: tax cuts like these do not lead to faster growth, but only to lower revenues.
This is especially so now, when the unemployment rate is just over 4%. Any significant increase to aggregate demand would be met by a corresponding increase in interest rates. The “economic mix” of the economy would thus shift away from investment; and growth, already anemic, would slow.
An alternative framework would increase revenues and boost growth. It would include real corporate-tax reform, eliminating the tricks that allow some of the world’s largest companies to pay miniscule taxes, in some cases far less than 5% of their profits, giving them an unfair advantage over small local businesses. It would establish a minimum tax and eliminate the special treatment of capital gains and dividends, compelling the very rich to pay at least the same percentage of their income in taxes as other citizens. And it would introduce a carbon tax, to help accelerate the transition to a green economy.
Tax policy can also be used to shape the economy. In addition to offering benefits to those who invest, carry out research, and create jobs, higher taxes on land and real-estate speculation would redirect capital toward productivity-enhancing spending—the key to long-term improvement in living standards.
An administration of plutocrats—most of whom gained their wealth from rent-seeking activities, rather than from productive entrepreneurship—could be expected to reward themselves. But the Republicans’ proposed tax reform is a bigger gift to corporations and the ultra-rich than most had anticipated. It avoids necessary reforms and would leave the country with a mountain of debt; the consequences—low investment, stalled productivity growth, and yawning inequality—would take decades to undo.
Trump assumed office promising to “drain the swamp” in Washington, DC. Instead, the swamp has grown wider and deeper. With the Republicans’ proposed tax reform, it threatens to engulf the US economy.
© 2017 Project Syndicate.
How About ‘Free-Based’ Index Annuities?
Financial products aren’t like other products. When you pay a premium for a four-piece Sage fly rod, you don’t get only three sections of the rod. If you buy a cashmere overcoat at Bergdorf Goodman, and pay extra for the polite service, the prestige brand and the store’s high-rent location, your overcoat isn’t less warm or well-tailored.
But when you pay extra for a financial product, then you’re getting a more or less flawed product. The amount you pay for distribution or service or advice effectively reduces its value to you. Financial products are unusual in this way.
Fee-based indexed annuities are a good example. These are indexed annuities that have no distribution costs—i.e., broker or agent commissions—baked into their crediting formulas. Fresh off the factory floor, so to speak, they have the potential, in up markets, to yield significantly more than commission-based indexed annuities.
Life insurers created these products in response to the DOL fiduciary rule. The rule made selling on commission to IRA clients more legally and administratively onerous, so many brokers and agents have migrated to a fee-based revenue model, where they earn a percentage of the assets they manage. The fee-based FIA lets them continue to sell FIAs within their new revenue if they choose.
But will they? Will brokers-turned advisors keep selling FIAs, even without the incentive of a commission? Will traditional fee-based advisors start selling them, now that they don’t carry a commission? Will consumers demand them—or even learn that they’re available?
More to the point, if fee-based advisors sell these new products, how will they bill clients for them? So far, it appears that advisors at some brokerages are planning to charge their usual managed account fee for the tax-deferred client money that’s used to buy an FIA contract. I don’t think that’s appropriate, for these reasons:
- FIAs are guaranteed products. Investment management is really about managing the risks of securities, particularly stocks. That’s where professional expertise comes in. FIAs are not securities, as the court decision on Rule 151A determined a few years ago. They aren’t risky at the client level, so there’s no risk management to charge for.
- FIAs are packaged products. The risk management techniques and the insurers bake the costs of those techniques into the crediting method, even before any distribution costs are tacked on. By the time the product reaches investors, the cost of “advice,” in a sense, has already been deducted.
- FIAs are general account products. The assets live at the life insurer, not at the brokerage’s custodian. Fee-based advisors don’t charge a fee on other general account products, like single-premium immediate annuities—which is a major reason why they don’t recommend them, even when they should—so why should they earn a fee on no-commission FIAs?
Instead, they should either charge a small one-time transactional fee on the sale or a much-reduced ongoing fee–as they might on a bond ladder or a fixed deferred annuity. If RIAs do try to charge the full rate, you can bet that some robo-RIA will undersell them. It certainly makes no sense to charge someone 10 times more for a $500,000 FIA than for a $50,000 FIA.
Brokerage executives counter that they deserve to make a living. A living, yes—but not a killing. If they truly are fiduciaries, their way of making a living shouldn’t involve a zero-sum game with clients. Charging a full management fee on risky assets isn’t necessarily a zero-sum game, but doing so on an FIA comes dangerously close. (If advisors aspire to be professionals, like doctors or lawyers, they should charge by the hour, as other professionals do. But that’s another story.)
If fee-based advisors charge a managed account fee on FIA assets, then the financial industry will only have complied with the letter of the fiduciary rule. It won’t have embraced the spirit of the rule, which was to help 401(k) and IRA savers maximize their retirement income. If they did that, and charged little or nothing, fee-based FIAs would practically sell themselves.
© 2017 RIJ Publishing LLC. All rights reserved.
Market value of U.S. retirement savings reaches $26.6tr in 2Q17
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.
Wells Fargo led all banks in annuity fee income in 2Q17
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.
Honorable Mention
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.
A Disappearing Workforce to Support the Elderly
‘Rothification is a Stupid Idea’
Donald Trump’s tax cut plan, or rather a sketch for a draft of one, became public yesterday. It included a brief reassurance that tax incentives for retirement savings would not be sacrificed to pay for the cuts, but didn’t contain specifics on that topic.
Two days earlier, at the Insured Retirement Institute conference in Palm Beach on Monday, a panel of Washington veterans discussed the issues that preoccupy the thoughts of many of the annuity manufacturers and distributors who attended the meeting.
They worry that the administration might try to pay for tax relief for corporations and wealthy individuals by making the tax treatment of contributions to (and growth in) retirement plan accounts more like the treatment of Roth accounts. Income tax on contributions to traditional retirement accounts can be deferred until age 70½. Contributions to Roth accounts are taxable but withdrawals are generally not taxed.
The retirement industry opposes that shift, as did members of the panel at the IRI conference.
“Rothification is a stupid idea that will not die,” said Seth Harris, an ex-deputy Secretary of Labor in the Obama administration. “It’s bad policy that’s there just to fund a corporate tax cut. The tax cut will have to be paid for, and the other pay-fors are just as ugly. But the Roth 401(k) is a horrible idea.”
Another panelist, Sean Cassidy, vice president of federal government affairs for Voya Financial, described one possible scenario.
“We’re looking at the potential impact of Rothification. The Camp draft proposal (written by former House Ways and Means chairman Dave Camp, R-MI) of 2014 proposed a 50/50 model where the first $9,000 in contributions is tax-deferred and the next $9,000 is on a Roth basis. That idea is currently in play, but now they’re asking, ‘How low can we draw the tax-deferred line? At $3,500? $2,500?”
The retirement industry, which relies on tax deferral to incentivize plan participants to save, believes that a weakened form of tax deferral would hurt the industry and hurt retirees.
“My company is concerned about the behavioral response. Will people stop saving at the tax-deferred limit?” Cassidy said, noting that the retirees don’t necessarily feel commonality with the industry. “Politically, it’s sensitive. The voting public is shedding no rears for the life or annuity industry,” he added.
A highly technical but important problem, Cassidy explained, is that tax deferral for retirement savings appears on the annual federal budget as a conspicuous twelve-figure expense, with no precise accounting for the income taxes that retirees will eventually pay when they withdraw the savings.
“Congress looks at tax deferral as an expenditure,” he said. “They put it on the same list as true deductions like the mortgage interest deduction. We’re saying, bring the money [the future income tax paid on withdrawals from 401(k)s and IRAs] into the 10-year budget window [where it would be netted against current expenditures].
The panelist, moderated by TV journalist Candy Crowley, also commented on the Obama Department of Labor’s fiduciary rule, with its requirement that advisors act in their clients’ best interests when handling retirement savings. It’s expected that the Trump administration will delay action on the rule until July 2019.
The annuity industry, assuming Hillary Clinton would be president and continue Obama retirement policies, has already done much to adapt to those policies, even as it continues to oppose them. It has spent tens of millions on new products, training, technology and compliance procedures—which may never be rolled back, regardless of what the Trump administration does.
“The battle over the best interest exemption is over,” Harris said. “The new battle will be over who is in charge. If Labor strikes down the DOL rule, then the SEC and the National Association of Insurance Commissioners will become important. Then the debate will be, ‘What is the enforcement policy?’
“But if you’re all breathing a sigh of relief over the 18-month delay, that would be a mistake,” he added. “It’s just breathing room. The SEC hasn’t produced a rule in seven years; it’s not going to produce one in 18 months. It will be up to the industry to push the SEC and DOL and NAIC into a room and give them clear guidance about what you want. But I think you’ll get a regime that’s more acceptable to industry than what we have now.”
But with so much uncertainty in the Labor department, where budgets are reportedly being slashed and no deputy Labor secretary for employee benefits has even been nominated, progress might be difficult. “There’s DOL fatigue on Capital Hill,” Cassidy said. “The legislative staff turns over and then the next wave needs to be educated about the issues. It’s like pushing string.”
All three panelists—former Oklahoma Republican congressman J.C. Watts was the third—agreed that confusion reigns in official Washington today, and that the main source of dysfunction is President Trump himself. “There’s no plan, no strategy. He just acquiesces to things and then backs away and gets outraged if he loses,” said Cassidy.
Watts agreed. “I don’t think there’s a strategy [behind what Trump does],” he said. “To him, people are just actors on a stage and he has to control the script. He will always position himself to lead the parade if he wins and blame somebody if he loses.”
© 2017 RIJ Publishing LLC. All rights reserved.
To increase sales of active funds, bundle them with passive: Cerulli
Asset managers need to better align their product development plans with the processes that financial advisors use when constructing portfolios out of various funds, investment vehicles and assets classes, according to new research from Cerulli Associates.
“Asset managers are looking to provide asset allocation to differentiate themselves,” said Brendan Powers, senior analyst at Cerulli, in a release. “Asset managers must be able to shift and reshape as the industry does. As advisors’ needs are changing, so must the product lines.”
With product commoditization and platform consolidation is making it tougher for standalone products to compete, 58% of asset managers are offering asset allocations that consist entirely of their own underlying strategies, Cerulli found. Firms with multi-asset-class capabilities may want to combine active and passive funds within quantitative or strategic beta strategies as way to increase sales.
“These capabilities can be offered at a lower cost compared to active, with upside potential over the index,” the release said.
Asset managers need to recognize where active management has advantages over passive (e.g., municipal bond, emerging markets equity), and where passive management holds an advantage (e.g., U.S. equity), Cerulli noted.
Cerulli’s latest report, U.S. Product Development 2017: Advisor Product Demand in a Model-Driven Environment, provides tactical data for understanding advisor product use, continued coverage of active versus passive, and advisors’ increased reliance on investment models.
© 2017 RIJ Publishing LLC. All rights reserved.
As risk premium shrinks, so does investors’ risk appetite
Experienced investors understand that the risk premium isn’t a constant, and that it gets smaller as price/earnings ratios rise. That may help explain recent investor behavior.
In August, investors put $8.5 billion into U.S. equity passive funds, down from $10.8 billion in July 2017. On the active front, investors pulled $23.0 billion out of U.S. equity funds, compared with $19.6 billion in July, according to Morningstar’s latest monthly asset flow report.
(Morningstar estimates net mutual fund flow by the change in assets not explained by performance and net ETF flow by the change in shares outstanding.)
The report for August said:
- Taxable bond was the lead fund category, with $27.5 billion in net flows. For the first time since May, active taxable-bond flows surpassed passive, by $14.1 billion to $13.3 billion.
- The four Morningstar Categories with the highest inflows in August were: Intermediate-term bond, foreign large blend, multi-sector bond, and diversified emerging markets. Large blend did not make the top five categories, as interest in U.S. equities waned.
- PIMCO led in active flows with $4.1 billion, followed by Vanguard with $1.4 billion.
- The two active funds with the highest inflows were the same in August as they were in July: PIMCO Income, with flows of $3.1 billion, followed by Oakmark International with $911.0 million in flows.
- On the passive front, Vanguard was the top fund family, with inflows of $19.3 billion, followed by BlackRock/iShares, with inflows of $9.9 billion, and Fidelity, who is benefiting from multiple rounds of fee cuts.
- The passive funds with the highest inflows were Vanguard Total Stock Market Index Fund ($6.2 billion) and Vanguard Total International Stock Index Fund ($2.5 billion).
- BlackRock High Yield Bond had the highest outflows in August of $1.4 billion.
- Growth funds from Fidelity, T. Rowe Price, and American Funds also suffered large outflows as investors kept avoiding U.S. equity and growth stocks.
To view the complete report, please click here.
© 2017 Morningstar, Inc.
