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Roth 401(k)s Are the People’s Choice

Encouraging or requiring the conversion of 401(k) plans—or 401(k) contributions above a certain level—into Roth 401(k) plans is one of the deficit-reducing changes said to be under consideration by staffers at the Senate Finance committee as they try to reform the tax code.

Here’s the logic: A switch to Roths could boost federal tax revenues by capping or eliminating the deferral of income taxes on 401(k) contributions until age 70½. Instead, contributions would be taxed and withdrawals wouldn’t be.

Now comes research showing that “taxpayers generally prefer back-loaded plans [Roth 401(k)s] over front-loaded plans [traditional 401(k)s].” This finding was published in a recent paper from the Center for Retirement Research at Boston College.

Oddly enough, many people seemed to prefer Roth 401(k)s without necessarily understanding the tax implications of doing so. In fact, most were unaware of the tax implications and many preferred Roths even if the switch produced worse financial outcomes. 

“Our results suggest that individuals, on average, do not respond ‘rationally’ to the relative economic incentives associated with alternatively structured plans,” wrote Andrew D. Cuccia of the University of Oklahoma and Marcus M. Doxey and Shane R. Stinson of the University of Alabama. 

But individuals didn’t necessarily act irrationally. The preference for Roth 401(k)s may simply confirm certain principles of behavioral economics. The authors mentioned four of those principles in their paper and suggested their impact on the preference for Roth 401(k)s:

Prospective mental accounting. It’s possible that people can in fact delay gratification.

“Thinking about the pleasure of consumption can blunt the pain of paying for it,” the paper said. “Taxpayers may anticipate greater overall net utility from the income if the related tax is paid prior to its receipt, as in a back-loaded plan… With a front-loaded plan, taxpayers may consider the tax cost of the savings twice; once indirectly at the time of contribution when the savings are set aside and again upon receipt when the taxes are actually paid.”

Framing and intertemporal reference points. Behavioral economists have shown that losses generally loom larger in the mind than gains. “If taxpayers adapt to paying taxes currently on income, investment in a front-loaded savings vehicle might be framed as a deferral of that tax, or the trade of an immediate gain for a future loss,” the paper said.  

Dread. It’s possible that participants are quite aware that they will pay tax on required minimum distributions from tax-favored accounts in the future, and they don’t like it hanging over them. “If taxpayers focus on the taxes actually paid, they may prefer to “get it over with” and pay those taxes now, as required of a back-loaded plan, avoiding the dread associated with the looming payment required by a front-loaded plan,” the paper said.

Uncertainty. Many people are now converting traditional IRAs to Roth IRAs out of fear of potential tax hikes in the future, participant may be applying the same logic when they prefer Roth 401(k)s to traditional 401(k)s. “A back-loaded plan may be seen as a relatively more “certain” prospect because the taxpayer knows both the tax rate on current contributions and, therefore, the amount of taxes being paid, as well as the tax (none) that will be due on subsequent earnings and qualifying withdrawals,” the paper said. “Neither future tax rate changes nor the taxpayer’s economic status will impact the amount of taxes paid and saved.”

Switching to a Roth-based defined contribution system would probably make life a whole lot simpler for most people. Wealthy retirees hate the RMDs because it forces them to take taxable distributions they wouldn’t otherwise take. (They tend to have amnesia about the benefits of tax deferral.) People tend to spend much of the benefits of tax deferral anyway, because the tax savings ends up in their paycheck, not in their 401(k) account.

The 401(k) industry (and the mutual fund industry, which regards defined contribution plans as an important distribution channel) will never allow an industry-wide shift to Roth-style accounts, however. They worry that participants will contribute less (or not at all) to their accounts without the attraction of tax deferral. And advisors who sell 401(k) plans to independent business owners worry that, if those owners can’t shelter some $50,000 a year from income taxes by sponsoring a plan, they won’t sponsor a plan at all.

© 2017 RIJ Publishing LLC. All rights reserved.

Fed leaves rates unchanged at 1% to 1.25%

The Federal Open Market Committee released the minutes of its July 25-26 meeting this week, and issued a press release. Highlights of the release included:

  • With gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further.
  • In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent.
  • The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
  • Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term.
  • For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.
  • The Committee directs the Open Market Desk at the Federal Reserve Bank of New York to continue rolling over maturing Treasury securities at auction and to continue reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities.

© 2017 RIJ Publishing LLC. All rights reserved.

ERISA lawyers explain latest DOL moves

The law firm of Drinker Biddle issued a Client Alert on August 10 explaining the significance of a new set of answers to frequently-asked-questions (FAQs) recently issued by Department of Labor with respect to the fiduciary rule.

“In light of possible changes to the rule, these FAQs give transition relief for providing a 408(b)(2) change notice of fiduciary status,” attorneys Bruce L. Ashton, Bradford P. Campbell and Joan M. Neri wrote. “The FAQs also clarify the scope of fiduciary advice for recommendations to increase plan participation and contribution rates.”

The biggest effect, they wrote, “is an extension of the 60-day deadline that otherwise would have expired on August 8. For those who need to make a change, there is now more time to do so.

“The most interesting change is that as long as the service agreement accurately describes the adviser’s services, and as long as the agreement or other writings do not disclaim fiduciary status, the adviser can avoid calling itself a fiduciary during the transition period, even if it is providing fiduciary advice.”

408(b)(2) disclosure and the fiduciary rule

Some retirement plan service providers have been confused, the attorneys wrote, about whether they need to provide a change notice related to their fiduciary status under the fiduciary rule, and if so, when.

Under the existing 408(b)(2) regulation, the Drinker Biddle Client Alert said, a service provider that expects to be a fiduciary to an ERISA plan must disclose to the responsible plan fiduciary its status as a fiduciary, along with a description of its services and fees, reasonably in advance of entering into a relationship with the plan.

But, according to DOL’s latest statement on the topic, service providers that expect to provide fiduciary advice to plans do not have to use the word “fiduciary” during the transition period, so long as they accurately and completely describe the services they are providing that would make them fiduciaries.

Service providers that believe they won’t be providing fiduciary advice to plans after June 9 do not need to disclose fiduciary status.

“Service providers should tread carefully here,” the Client Alert warned. “This relief may be somewhat of a trap, since disclosures are often general and lack the specificity that the FAQs seem to require.”

Somewhat ironically, service providers that are not fiduciaries or are not providing fiduciary services can’t avoid using the word “fiduciary” under this DOL relief. “The transition period relief allows service providers to avoid using the word ‘fiduciary’ to affirmatively describe their services, but it does not allow them to deny fiduciary status directly,” the attorneys pointed out.

No disclosure required for unauthorized actions

In the FAQs, the DOL formally endorsed the view, already held by ERISA practitioners, that “unauthorized and irregular” actions by employees or representatives of a service provider that is not a fiduciary and that are beyond the service provider’s contract terms (e.g., recommendation of a rollover by a call center representative who is only authorized to provide educational information) do not necessitate a disclosure of fiduciary status under 408(b)(2) even though that unauthorized action was fiduciary advice.”

The Client Alert also said:

■ The new relief only applies during the transition period. Once the fiduciary rules become fully applicable, service providers who are fiduciaries under the new version of the rule will need to make a complete 408(b)(2) disclosure of their status as such.   

■ If the service provider was already a fiduciary but failed to disclose that status in a 408(b)(2) notice, the FAQs don’t provide any relief and the service provider may have engaged in a prohibited transaction.

■ Communications to plan or IRA participants encouraging plan contributions to meet “objective financial retirement milestones, goals or parameters” are not fiduciary advice, so long as no specific investment product or investment strategy is recommended. Such communications may include, for example:

  • Plan enrollment brochures recommending that a participant contribute a certain percentage of pay
  • Targeted emails that suggest that a participant increase his contributions by a certain percentage each year
  • Targeted emails that suggest an amount to contribute based upon the individual’s current plan savings
  • Call center assistance that suggests a specific overall retirement savings goal
  • Recommendations to a plan fiduciary on how to increase plan participation are not fiduciary advice, even if the recommendations are based on specific attributes of the plan or its demographics

“A safe course would seem to be to tie the recommendation to specific goals, parameters or milestones rather than a general encouragement to defer more,” the Alert recommended.

© 2017 RIJ Publishing LLC. All rights reserved.

Annuity issuers need to innovate: A.M. Best

Boomer retirement, now well under way, was supposed to bring boom times to the life insurance industry, which alone can write life annuities. It hasn’t been working out that way, and a new report from A.M. Best explains why.

Individual annuity direct premiums written (DPW) declined by 4.9% in 2016 to $202.7 billion after tepid increases each year from 2012 to 2014, according to “Regulatory Uncertainty, Equity Market Volatility Lead to Shifting Trends in Individual Annuity Products,” the new report from the ratings agency.

That muted annual growth rate, averaging only 0.7% over the last four years, reflects the pressures that annuity writers face: increased life expectancies, persistently low interest rates, volatility in the financial markets and the uncertainty surrounding the DOL fiduciary rule.

Interestingly, the report adds “the imminent retirement of baby boomers” to list of annuity issuer headwinds.

A.M. Best has revised its outlook for the life/annuity industry to negative from stable. The industry doesn’t look vulnerable to any single shock, but it is susceptible to a multitude of pressures, the report said.

Although many post-election signs in the U.S. appear favorable for life insurers, A.M. Best believes it “may be a little too early to lock in this enthusiasm,” given the risk of global economic volatility, changing regulation, evolving capital requirements, and increased investment risk.

Product innovation will be essential to success, A.M. Best said in a release: “The annuity industry has a growing need for products that deliver guaranteed income and new market segments to engage an aging population… As insurers continue to adapt to the landscape, product innovation and strategic decisions on product focus remain imperative.”

Annuities comprise a sizeable portion of the life insurance industry’s business production. Individual annuities have fluctuated at around 30% of the industry’s net premium written (NPW) and 45% of reserves over the last 10 years (2007-2016). Individual annuities also have consistently contributed favorable pre-tax operating gains, accounting for 30%-45% of operating gains in each of the last eight years except for 2011.

Group annuities have contributed an additional 19% in NPW and 11% in reserves, thanks to the emerging pension risk transfer market.

Variable annuities (VA), which are registered securities and might be considered a subset of the mutual fund industry, remain the largest contributor to DPW, at 36.2%. But their contribution to DPW has declined since 2012. The VA market is concentrated, with the top 10 individual VA writers accounting for 77% of the market in 2016. The indexed annuity market is similarly concentrated.  

The traditional fixed deferred annuity space remains tiny but competitive. It accounts for only about one quarter of individual annuity premium, but almost twice as many insurers wrote $50 million or more of DPW in 2016 than wrote VA and indexed annuities.

Companies with greater investments in technology and more technical expertise in product development likely can conduct better cluster analysis to help identify commonalities in customer characteristics and behavior, which would help to minimize lapse ratios and better predict policyholder behavior, the report said.

© 2017 RIJ Publishing LLC. All rights reserved.

 

Brighthouse offers fee-based indexed variable annuity

Brighthouse, the company that was formed from MetLife’s individual products business and which went public earlier this month, has announced the launch of new index-linked annuities as part of its flagship Shield annuity family, including a design for fee-based advisors.

Like fixed indexed annuities, these packaged products invest in bonds and options on equity indexes. Unlike FIAs, they don’t guarantee zero losses; instead, the issuers absorb the first 10% (or more) of losses. In return, investors get a chance for higher returns than they would get on FIAs.

Indexed variable annuities enjoyed a sales burst in recent years. Brighthouse Financial reported that sales of its Shield portfolio “remained strong in the second quarter of 2017 at $570 million, up 28% year-over-year.” The products were previously sold under the MetLife brand.

The new Brighthouse products include:

Brighthouse Shield Level Select 3-Year and Shield Level Select 6-Year annuities. These product options feature no annual fee, offer a 3 or 6-year surrender charge schedule, and include a new standard return-of-premium death benefit.

Brighthouse Shield Level Select Access annuity. This product is designed for fee-based advisors who would like to offer annuity solutions as part of their practices. There is no surrender charge schedule and no annual product fees (other than the cost of advisory services).  

© 2017 RIJ Publishing LLC. All rights reserved.

Fiduciary rule delayed until July 1, 2019: DOL

Apparently responding to requests from financial industry lobbies like the Investment Company Institute for further delays in the enforcement of the Obama-era “fiduciary rule,” the Department of Labor filed this statement in Minnesota federal court Wednesday:

“On August 9, 2017, the Department submitted to the Office of Management and Budget (“OMB”) proposed amendments to three exemptions, entitled: Extension of Transition Period and Delay of Applicability Dates From January 1, 2018, to July 1, 2019; Best Interest Contract Exemption (PTE 2016-01); Class Exemption for Principal Transactions in Certain Assets Between Investment Advice Fiduciaries and Employee Benefit Plans and IRAs (PTE 2016-02); Prohibited Transaction Exemption 84-24 for Certain Transactions Involving Insurance Agents and Brokers, Pension Consultants, Insurance Companies, and Investment Company Principal Underwriters (PTE 84-24).”

The delay will allow brokers to sell variable and indexed annuities under the PTE 84-24 exemption for at least about two more years, rather than under the more stringent Best Interest Contract Exemption, which gave investors the right to participate in class-action suits against financial services companies in cases of systematic abuse of the rule.   

Further DOL notices were expected today.

In a release Wednesday, Jamie Hopkins, co-director of the Retirement Income Program at the American College, said about the new 18-month delay:

“The proposed delay was entirely expected. We knew that secretary Acosta wanted to delay the full implementation date at least a year. Some industry groups have been pushing for a two-year delay, so it appears they are going to split the difference. The delay is really more about giving the DOL time to rework the rule rather than companies really needing more time to prepare.

“There is an expectation that the private right to action through class action lawsuits will be removed from the rule, some product specific changes will like be built into the rule, and we should expect to even see some more and expanded exemptions from the general rule to allow many companies to keep doing business as they do today without significant change or interruption.”

© 2017 RIJ Publishing LLC. All rights reserved.

Some DC plan sponsors would switch to state-run plans: LIMRA SRI

As many as 30% of employers who offer a defined contribution (DC) plan say they are very likely to stop offering their defined contribution plan and have their employees enroll in a state-run retirement savings plan, according to a new study from the LIMRA Secure Retirement Institute.

California and Oregon are the states closest to launching their own state-sponsored Roth IRA plans for workers who don’t currently have access to a plan. But Congress’ recent reversals of an Obama administration ruling and the Department of Labor’s cancellation the federal MyRA program for such workers could hamper the roll out of state run plans.

Employers that sponsor DC plans with over $50 million in assets were more inclined than sponsors of plans with under $10 million in assets to say they would replace their existing DC plan with the state-run plan (31% versus 22%), the study showed.

The intent of the state-run retirement plans is to offer workplace retirement access to those who do not currently have it. “Employers who drop their DC plan and shift their employees to a state-run plan may weaken their employees’ ability to save adequately for their retirement,” LIMRA SRI release warned.

Many state-run plans are designed as individual retirement accounts (IRAs), which limit investors under 50 years of age to contribute $5,500 per year while DC plans allow up participants to contribute as much as $18,000 annually.

Institute research finds 86% of workers feel it is important to be able to contribute more than $5,000 a year to their retirement savings. This could also undermine long-term retirement security.

An employee under age 50 making $75,000 a year saving 10% in their DC plan ($7,500 per year) would be limited to $5,500 a year in a state-run plan. Over the course of 20 years (excluding investment growth, fees, withdrawals, increases in salary, etc.) this amounts to $40,000 in lost retirement savings.

But, while they can save that much, most current 401(k) participants save much less. The median contribution for all participants in 2012 was only $2,981, according to a study published in Social Security Bulletin, Vol. 77, No. 2, 2017.

Even among full-time workers ages 25 to 59 in the second-to-wealthiest income decile, the median contribution in 2012 was only $6,039. Those in the top 10% of earnings contributed a median of $12,368.

Employees surveyed by LIMRA SRI placed high value on certain aspects of DC plans that may not be part of a state-run plan:

  • Nine in 10 workers value the ability of their employer to contribute to their retirement, which is not allowed under state-run IRAs.
  • Eight in 10 workers say investment variety and education are important DC features — not offered in most proposed state-run plans.
  • Nine in 10 employees value investment diversity (at this point, investment options are unclear in state run proposals).

LIMRA Secure Retirement Institute conducted nationwide surveys of more than 1,000 employers that offer defined contribution plans and nearly 2,500 workers in 2016 to explore perceptions around state-run retirement programs. The results were weighted to reflect the US population.

Any large change to the retirement plan business would have a big impact on the mutual fund business, for which plans are a major distribution channel. Mutual fund assets held in retirement accounts (IRAs and DC plan accounts, including 401(k) plans) stood at $8.0 trillion as of the end of March 2017, or 47% of overall mutual fund assets, according to the Investment Company Institute.

Fund assets in 401(k) plans stood at $3.2 trillion, or 19% of total mutual fund assets as of March 31, 2017. Retirement savings accounts held about half of long-term mutual fund assets industry-wide but a much smaller share of money market fund assets industry-wide (14%).

© 2017 RIJ Publishing LLC. All rights reserved.

As Boomers retire, economy will slow: BerkeleyAGE

The arrival of the Boomer generation in the late 1940s gave birth to 65 years of accelerated economic growth and innovation in the U.S. The retirement of the Boomers could have a decelerating effect. 

The global economy in 2040 will be 20% smaller under projected 2015-2040 population trends than it would have been if the population trends of 1990-2015 had continued, according to a report published in June by the Berkeley Forum on Aging and the Global Economy (BerkeleyAGE).

Demographic “tailwinds” accounted for 48% of annual economic growth from 1990-2015, the report said. But the global population ages 20-64 will grow less than half as fast from 2015-2040 as compared to the prior 25 years, while the age 65+ population will grow five times faster than the working age population.

The tailwinds in the United States and other major economies will therefore only be about 31% as strong going forward, BerkeleyAGE predicted. In the U.S., tailwinds will drop by 0.8% per year, only slightly better than the 0.9% drop in other high-income countries.

Among high-income countries overall, the working age population (ages 20-64) will decline by 4% between 2015 and 2040. In the United States, the working age population will instead increase (slightly) by 5% during this period (due in part to higher migration and fertility than in other high income countries), but this is still a sharp slowdown in the growth rate of the potential labor force as compared to the prior 1990-2015 period.

Tailwinds that added 1.3% per year to global economic growth during 1990-2015 will drop to only 0.4% per year from 2015-2040. Nigeria’s tailwind will increase by 0.4%, while China, whose working age population began to shrink in 2016, will transition from a 1.5% annual tailwind to a 0.6% headwind.

© 2017 RIJ Publishing LLC. All rights reserved.

Moshe Milevsky wins award for book on tontines

King William’s Tontine: Why the Retirement Annuity of the Future Should Resemble Its Past, by York University finance professor Moshe Milevsky, has received the 2017 Kulp-Wright Book Award from the American Risk and Insurance Association.

The prize, awarded annually by ARIA since 1944, goes to the previous year’s most influential book on risk management and insurance.  

“This honor shows that tontine thinking, in the design of personal risk management products, is a concept with a high likelihood of catching-on in both academia and industry,” Milevsky said in a release.

“It also proves that there are valuable lessons to be learned from 17th century financial and insurance history, even in the rapidly changing 21st century.” Milevsky said he is about to publish a “prequel” titled The Day the King Defaulted: Lessons from the Stop of the Exchequer in 1672.

The award was presented at the annual ARIA conference in Toronto this week. Articles on Milevsky’s research on tontines and the history of financial retirement products appeared in the Economist in June and The New York Times in April.

© 2017 RIJ Publishing LLC. All rights reserved.

Honorable Mention

‘One share of Brighthouse for every 11 shares of MET’

Brighthouse Financial, Inc. today announced that its separation from MetLife, Inc. was completed on Friday, Aug. 4, 2017. Brighthouse common stock began “regular-way” trading under the symbol “BHF” on the NASDAQ Stock Market on Aug. 7, 2017, when markets opened. MetLife will continue to trade on the NYSE under the ticker symbol “MET.”

Brighthouse is a U.S. provider of annuity and life insurance solutions with $219 billion of total assets and over 2.7 million annuity contracts and life insurance policies in-force. It has distribution relationships with more than 400 partners.

Under the terms of the separation, on the Aug. 4, 2017 distribution date, MetLife, Inc. common shareholders received a distribution of one share of Brighthouse Financial, Inc. common stock for every 11 shares of MetLife, Inc. common stock they held as of 5 p.m. New York City time on the July 19, 2017 record date.

MetLife, Inc. common shareholders who sold their “MET” shares in the “regular-way” market after that date, but before and through the August 4 date that Brighthouse Financial, Inc. common stock was distributed, sold their entitlement to receive Brighthouse Financial, Inc. common stock in the distribution.

Shareholders of MetLife, Inc. who owned less than 11 shares of common stock, or others who would otherwise have received fractional shares, received cash.

Brookstone Capital to distribute Great American’s fee-based FIA

Great American Life Insurance Companyannounced this week that Brookstone Capital Management (BCM) will distribute its fee-based fixed indexed annuity. Nearly 50 Registered Investment Advisors (RIAs) can now sell Great American’s Index Protector 7.

Index Protector was one of the first fee-based annuities to be offered. Like other indexed annuities, it offers earning potential, tax-deferred growth and a return of premium guarantee. Consumers can add the Income Keeper rider, which provides lifetime income payments that may increase when equity markets rise

Great American Life Insurance Company is a member of Great American Insurance Group and is rated “A+” by Standard & Poor’s and “A” (Excellent) by A.M. Best for financial strength and operating performance.

Four brokers charged in $40 million variable annuity sales fraud

Variable deferred annuities are once again on the defensive in the national media.

On July 31, the Securities and Exchange Commission charged four Atlanta-area brokers with fraudulently selling $40 million worth of VA contracts to more than 200 Georgia participants in the federal government’s Thrift Savings Program (TSP).

The suit was reported this week in the New York Times.

In a complaint filed in the Atlanta Division of U.S. District Court, Northern District of Georgia, the SEC charged four registered reps working for Keystone Capital Partners (dba Federal Employee Benefits Counselors) of inducing federal employees to roll money out of their TSP accounts to buy VAs with living benefits in 2012 through 2014.

The complaint doesn’t name the insurance company or companies that issued the variable annuity contracts. The four accused brokers—Christopher S. Laws, 49, Jonathan D. Cooke, 34, Danny S. Hood, 44 and Brandon P. Long, 28—earned an alleged $1.7 million in commissions from the sales.

The SEC charged the men with pretending to represent government benefits counselors and with misrepresenting the product that they were selling. According to the complaint, didn’t identify it as a variable annuity, they didn’t explain the difference between the benefit base of the guaranteed lifetime withdrawal benefit and the account value, didn’t clarify that the 7% annual increase in the benefit base was not a guaranteed growth rate in the account value, didn’t establish the amount of the surrender penalty, and didn’t full explain the annual fees, which included a mortality and expense risk fee of 1.3% and an income rider fee of 1.25 to 1.50%.

Upon leaving federal service, federal employees have three options for making a full withdrawal of their entire TSP account, any two or three of which can be combined: (1) a single payment, (2) a series of monthly payments spread out over time, and (3) as a TSP life annuity, which the TSP purchases on behalf of the TSP participant from the TSP’s annuity vendor.

The TSP life annuity provides a monthly benefit paid to the employee for life and, if the employee chooses, for the life of a designated survivor. To purchase the life annuity, the former employee must complete a “Form TSP-70,” as a request for a full withdrawal from the TSP, and select the “life annuity” option within the “Withdrawal Election” section of that form.

Current federal employees age 59½ or older who are not planning an immediate separation from federal service have the option to take partial or full withdrawals from their TSP accounts. To effectuate such a withdrawal, which is referred to as an age-based, in-service withdrawal, the employee must complete a “Form TSP-75.”

© 2017 RIJ Publishing LLC. All rights reserved.

On the Case: TIPS Ladder + QLAC + HELOC = Income Security

Financial advisors who have acquired the Retirement Management Analyst designation tend to approach retirement income planning a certain way. They typically lock in a client’s “floor” income with safe assets, and then look for “upside” by applying the money that’s left over to equities.   

Mike Lonier, founder of Lonier Financial Advisory, a fee-only planning firm in Osprey, Fla., holds the RMA certificate. He’s the third advisor (following Mark Warshawsky on July 20 and Jim Otar on August 3) to offer a solution for the case of Andrew, 64, and Laura, 63, a real (but incognito) suburban professional couple nearing retirement.

Each earns about $150,000 today, and they’ve saved about $1.2 million, most of it tax-deferred. They own long-term care insurance. They currently work with an advisor at a major brokerage, but they worry that their fees might be too high. 

Andrew is willing to work until age 70, but he wouldn’t mind retiring sooner. Laura is ready to switch to part-time work now. They haven’t decided whether to keep their $1.24 million home indefinitely, nor have they discussed their legacy goals. Their two children are grown and financially independent.

Lonier (right) evaluated their annual drawdown goal—$77,000 from investments, to supplement $75,000 in Social Security—and deemed it too aggressive. Using the RMA framework, he divided their assets into up to four parts. Mike Lonier

He dedicated one part to provision of annual floor income, one part to equity exposure, one part to a small cash reserve, and one part to the purchase of a deferred annuity. He also introduces the possibility of a Home Equity Conversion Mortgage Line of Credit (HECM LOC). Here are some specifics from the plan he submitted to RIJ:

Quick Take Away

For Andrew and Laura, the advisor has determined that their desired $77,000 per year annual drawdown could empty their $1.24 million portfolio (60/40 stock/bond allocation) in as few as 18 years. He recommends that they reduce their essential expenses by $33,000, build a ladder of Treasury Inflation-Protected Securities for essential income, a deferred income annuity to buffer longevity risk and the opening of a home equity line-of-credit.

Assumptions

  • Andrew, 64, and Laura, 63, each earn about $150,000 per year, for a combined income of about $300,000.
  • Andrew will work four more years until retirement at age 68, earning $150,000 per year and collecting $27,000 in rental income from his second home until retirement. He saves $25,000 per year during those years.  
  • Laura will work only part-time for four years until full retirement at age 67, earning $50,000 per year and saving $5,000 each year.  
  • Andrew will claims Social Security benefits at age 70 and Laura will claim at her full retirement age of 66.  
  • The annual inflation rate will be 2.5%; the long-term discount rate will be 3%. Equities will return 8.5% per year on average (two percentage points less than the historical average).
  • Based on a 30% equity, 54.7% bond, 10% deferred annuity and 5.3% cash portfolio, the couple’s expected average annual return (net of investment expenses and a 0.25% ongoing management fee) will be 3.88%.   
  • As a holder of the RMA certificate from the Retirement Income Industry Association, Lonier practices goal-based planning and uses the “build an income floor, then invest for upside” approach.
  • The advisor considers the clients’ entire “household balance sheet,” including assets (home equity, human capital (earning power, pensions), and social capital (Social Security), and liabilities (present value of future income needs), to determine if their retirement is over-or under-funded.

Advice Points

  • Andrew and Laura should divide and rank their expenses into essential and discretionary.
  • They should pare their essential pre-tax expenses in retirement to a real $110,000 today (or $121,000 starting four years from now). They can budget an additional $30,000 each year for discretionary purchases, to be made cautiously and sparingly.
  • Andrew and Laura should allocate 30% or $372,000 of their retirement savings to the pursuit of  “upside” by purchasing a global equity ETF, but only if they are willing to use their home equity as a reserve.
  • To provide “floor” income for 30 years, the couple should begin building a ladder of Treasury Inflation Protected Securities (TIPS), starting with a 4-year TIPS bond to cover the first year of retirement need from savings, a 5-year TIPS bond for the second year, a 6-year TIPS bond for the third, etc., up to a 10-year TIPS bond for the seventh year, and then an additional 10-year TIPS bond each year thereafter. Money allocated to the floor ladder but not yet expended could be kept in either a rolling CD-ladder or an intermediate bond fund (if the need is over five years away).
  • To buffer their risk of outliving their savings, they should apply 10% of savings to the purchase of a joint-life qualified longevity annuity contract (QLAC; a deferred annuity purchased with up to the lesser of 25% of qualified savings or $125,000) at retirement with income starting at age 80.   

Recommendations

The priority for Andrew and Laura is to reduce their essential expenses. As a second step, they must choose whether to incorporate home equity into their income plan or exclude it.  

For instance, if they choose to exclude their $1 million in home equity from their income plan, Andrew and Laura should allocate $970,527 to provide real income of $44,000 per year in income to supplement their annual Social Security and pension income of about $75,000.

By using that money to create a TIPS ladder, they can mitigate market risk, interest rate risk, and inflation risk. They can also allocate $124,000 to the purchase of a QLAC four years from now, invest $78,722 in equities and hold $65,851 as a cash reserve. 

If they take advantage of home equity, however, they can take some additional equity risk while backstopping their essential income if they experience market losses. The advisor recommends that Andrew and Laura set up a $300,000 HECM LOC. Alternately, the couple could downsize to a smaller primary residence and put $300,000 in cash or they could sell their second home.

With that $300,000 as a reserve, they can allocate $371,700 to stocks (via an ETF representing a global stock index) and apply just $677,549 to build their floor income out of TIPS, CDs and bond funds. The recommendation to buy a QLAC with 10% of their savings and hold a $65,851 cash reserve still applies.       

Bottom Line

The couple originally hoped to spend about 6% of their portfolio each year in retirement, or well over the 3.5% or 4% benchmark, and they had no plans to downsize from their current home or sell their second home. They were therefore on track to run out of money too soon.

If the couple follows this advisor’s recommendations, their portfolio should last about 32 years instead of about 18 years, assuring them an adequate income until their mid-90s and a projected legacy of about $1.14 million in their investment portfolio.

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© 2017 RIJ Publishing LLC. All rights reserved.

Why Not Medicare for All?

Republicans have so far failed to make good on their promise to repeal Obamacare—or even to replace it with a mean-spirited version that would kick tens of millions off insurance. Obamacare itself however left 28 million Americans completely uninsured and tens of millions more with unaffordable copayments, deductibles and uncovered services.

That’s why the Affordable Care Act has been vulnerable to Republican attacks. Obamacare is ultimately politically unsustainable because it relies too much on a private, for-profit insurance system to pay for healthcare. It is time to abandon this overly complex and expensive payments system and reconsider a single-payer system.

Basic healthcare is not insurable

The provision of healthcare is far more expensive (as a percentage of GDP) in the U.S. than in other developed capitalist countries, with no better outcomes. Other nations use a variety of methods of provisioning and paying for healthcare, ranging from full-on “socialization” with government ownership of the hospitals to market-based private ownership of medical practices.

Many use a single-payer system (whether provision of healthcare is nationalized or privatized), with government covering the costs, while some use private insurers. The U.S. is unique in relying so extensively on private for-profit insurers. In other countries that allow participation by private insurers, these are run more like heavily regulated, not-for-profit charities.

It is important to understand that insurance is supposed to be a bad deal for the insured. The idea behind it is that you pay small premiums to cover rare but expensive calamitous events. You pay for fire and auto insurance, for instance, over most of your life and hope that you will never have to collect benefits. Your premiums cover the insurance company’s payouts, plus their administrative costs and profits. Insurance is a good deal only when you’re unlucky.

Healthcare is much different from losses due to fire or automobile crashes. It is not rare. Most of our healthcare needs are routine (prenatal, birthing, and well-baby care; braces for the kids’ teeth; annual checkups and vaccinations) or due to chronic illness. Routine healthcare is not analogous to an “act of god” that destroys your house: it is predictable, welcome, and life enhancing.

Because it is both common and expensive, basic healthcare is not an insurable expense. Pre-existing conditions are not, in principle, insurable either: it is like purchasing insurance on a house that has just caught fire. The premiums that should be charged to cover a chronic, preexisting condition would be equal to the expected cost of treatments plus the insurer’s operating costs and profits. The patient would be better off simply paying for the healthcare costs out of pocket.

Everyone into the pool

Social Security and Medicare provide a model for reform along single-payer lines. Social Security’s old-age retirement plan is nearly universal, with the federal government acting as the single payer. Medicare is universal for those over age 65 and the main part of it is single payer, with the federal government making the payments.

Both of these programs impose a payroll tax and both build reserves to provide for an aging population. This is simultaneously a strength (“I paid in, so I deserve the benefits; it is not welfare”) and a weakness (intergenerational warriors continually foresee bankruptcy).

But we can look at the taxes another way, from the perspective of the economy as a whole. Taxing today’s workers reduces their net income, which reduces their spending. This frees resources that can bedirected to caring for the needs of today’s elderly; government spending on retirement and healthcare ensure that some of the resources are directed to satisfying those needs.

Since wages today account for less than half of national income, it would be better to broaden the tax base beyond payrolls. We should also tax other income sources, such as profits, capital gains, rents, and interest.

What is the right balance between spending and taxes? Let us pose two extremes. In the first case, the economy has enough spare resources to provide healthcare for all. The single-payer government simply spends enough to provide adequate healthcare with no additional taxes required.

In the second case, let us presume the economy is already at full employment of all resources. To move some of the employed resources into the healthcare sector, the government needs to impose taxes sufficient to reduce consumption and investment spending to free up resources for healthcare. It then spends to reemploy those resources in the healthcare sector.

The more likely case is somewhere between those two extremes, so that a combination of increased taxes and spending by the single payer can free up and move resources to provide healthcare for all. This insight can help us understand what’s wrong with a system that relies on a large number of private, for-profit insurers, and how such a system might be fixed.   

Competition among for-profit insurers works to exclude those who need healthcare the most—simultaneously boosting paperwork and billing costs even as it leaves people under-covered. If we do not allow insurers to exclude preexisting conditions, and if we could somehow block insurers’ ability to deny payments for expensive and chronic illnesses, then each insurer needs young and healthy people in the pool to subsidize the unhealthy.

The best way to ensure such diversification is to put the entire nation’s population into a single pool. If the “insured” pool includes all Americans, there is no possibility of shunting high-cost patients off to some other insurer. And total costs are much lower because billing is simplified, administrative costs are reduced, and no profits are required for operating the payments system.

This is essentially what we do with Medicare, albeit only for those over age 65. Medicare for all would provide the truly diversified pool needed to share the risks and distribute the costs across the entire population.

Medicare is a proven, cost-efficient payments system, and it is compatible with the more market-oriented system that Americans seem to prefer. A single-payer Medicare-style universal program is also compatible with the existence of private health insurance that can be voluntarily purchased to supplement the coverage offered by the single payer.

Just a few months ago, few politicians aside from Senator Bernie Sanders were willing to stand up for single-payer healthcare. However, the debate over “repeal and replace” has made it clear that if we are serious about providing universal healthcare to Americans, the only sensible option is single payer.

Randall Wray, Ph.D., is a post-Keynesian economist and Senior Scholar at the Levy Economics Institute of Bard College. This article is adapted from a longer Policy Note published this month by the Institute and republished here with the author’s permission.  

On the Case: Jim Otar Answers Our Income Challenge

Jim Otar, a Toronto-area CFP, has made lasting contributions to the field of retirement income planning. Every retirement income specialist should be familiar with his “aft-casting” technique, his book, his Retirement Optimizer software, and his useful classification of new retirees into green, yellow or red “zones.”   

When RIJ invited Otar to suggest a solution to the case of Andrew and Laura, he replied that the couple is “on the border of the green zone.” In Otar-speak, this means that they can relax. With about $1.24 million in savings and $1.8 million worth of real estate, they’re unlikely ever to run out of money.

“I would not worry too much about complicated strategies,” he wrote after a preliminary review of the information we provided about Andrew and Laura’s finances. (They’re a real couple, ages 63 and 64, whose names we’ve changed.) “They probably don’t need guaranteed income (annuities), a bucket strategy or anything fancy to cover their shortfall,” he said, referring to the difference between the couple’s desired annual income and their income from Social Security and pensions.  

Keep in mind that, two weeks ago in RIJ, Mark Warshawsky, also a much-published explorer of the retirement income space, recommended that Andrew and Laura put about half of their savings into safe income annuities and invest the rest in equities. Otar’s solution takes Andrew and Laura in a very different direction.

Quick take-away

In hoping for a pretax income of about $140,000 per year in retirement starting at ages 65 to 70, Andrew and Laura want more income than their $1.24 million portfolio alone can safely furnish for 25 or 30 years, according to Otar’s simulations. So he ran simulations based on a plan where they withdraw $50,000 per year. He determined that if the couple reduces expenses by at least $15,000 a year (requiring $35,000 from savings) or agree to sell their home at age 85 (if their portfolio looks like it might fail), they can both retire by age 70 or earlier.

RetirementOptimizer’s assumptions

  • Andrew and Laura are in Otar’s “Green Zone,” which means that their retirement is well-funded. They have enough savings and other assets to retire on, assuming they don’t over-spend or retire too early. Green-zoners don’t have to transfer their longevity risk to an insurance company via the purchase of a life annuity—though they have the option to do so if it makes them feel more comfortable or opens up other options (like taking on more market risk).  

People in the yellow zone (“constrained”) must change their plans if they hope to retire safely. They need to work longer, save more, cut expenses, abandon non-essential goals, or consider longevity-risk-pooling products like annuities or reverse-mortgages. People in the red zone (“underfunded”) have little choice but to consider risk-pooling products or simply bear longevity risk. Anyone, regardless of wealth level, can be in any of the zones; it depends on the ratio between their expenses and their income-generating resources.

  • Andrew and Laura want $50,000 a year from their $1.24 million in SEP-IRA and other savings to top up their combined Social Security ($72,000) and pension income ($7,000).   
  • Otar will project the distribution of possible future market performance scenarios through “aft-casting,” a proprietary technique that he uses instead of Monte Carlo simulations. Rather than based on purely randomized sequences of market returns, his projections are randomized among actual historical sequences of returns starting in 1900. In his experience, this method better accounts for the possibility of “black swan” events; it recognizes that “markets are random in the short term, cyclical in the medium term, and trending in the long term.”

Advice point: Invest in a balanced portfolio

Since Andrew and Laura don’t need annuities as a solution to longevity risk (i.e., living long enough to run out of money), Otar recommends a balanced asset allocation for their retirement savings. His analyses are based on a portfolio of 58% equities, 39% bonds and 3% cash, with annual rebalancing to that allocation. In this preliminary analysis, he doesn’t specific individual investments or make assumptions about investment expenses.

Advice point: Provide more detailed list of expenses

Andrew and Laura need to provide more details about their annual expenses than they have so far, especially if they hope to reduce them in retirement. “I normally ask for three pages of line-items of expenses,” Otar said. 

Advice point: Put expenses in a value hierarchy

With a nod toward goal-based income planning principles, Otar recommends that Andrew and Laura categorize their expenses as essential (i.e., food shelter, etc.), basic (i.e., customary or lifestyle-related) or discretionary (“bucket list” items). “If I had more a detailed list of expenses to work with, the outcomes would likely be more favorable,” he said, implying that expense-adjustments can often make or break a retirement income plan.

Advice Point: Clients need to decide how they view their real estate

Adam and Laura need to come to a decision about their homes. That is, are they committed to living in their primary house and second home indefinitely (perhaps as part of the bequest to their two daughters)? Or would they consider including the value of their homes in their retirement income plan, perhaps by planning to downsize or sell one of the homes later in life?

Recommendations

Otar offered three options for Laura and Andrew. They could:

Consider selling their home as a “stop-loss” strategy. They can both stop working by the time Andrew reaches ages 69, Otar said, if they agree that at age 85 they will sell their current home, put the proceeds of the sale into a cash-equivalent account and move into their second home.

They should execute this strategy in 20 years if their investments are in danger of running out before they reach age 95. Historically, there is a 40% chance of that happening. The proceeds of the sale of the primary home should be put in cash because of the couple’s short time horizon.

The first slide below demonstrates the outcomes if the couple intends to sell their house at age 85. The second slide demonstrates the outcomes if the couple holds that option (a 40% likelihood) open.

Otar Slide 3

Otar Slide 4

Reduce expenses and/or find other sources of income. If Laura and Andrew reduce expenses by $15,000 per year, or find an equal source of income (e.g., rent part their home, work part-time or as consultants), or any combination the two, then they can retire at age 70 and stay in their primary home for life without tapping into the value of the home.

Otar Slide 5

Keep working until age 74 or 75. If the couple is determined to achieve an income of $140,000 a year (from Social Security, pensions and withdrawals from investments) and to live in their home for life (and leave it as a bequest), one of them will need to work until age 75 (See first slide below). If they save $25,000 a year over the next ten years, they can both be retired by age 74 (See second slide below).

Otar Slide 1

Otar Slide 2

Bottom Line

Given their good health and the significant possibility of a 30-year retirement, Andrew and Laura need to be a bit more realistic about how much they can spend from savings in retirement, even with savings of $1.24 million.

They will have enough money, however, if they draw on their real estate wealth in retirement and are willing to sell their primary home (or selling both homes and moving into a rental) at age 85. The good news: If future returns are as high or higher than the historical median (as calculated by Otar), their portfolio will be worth at least $2 million in 30 years.

Otar didn’t include nursing home expenses in his plan. The couple has long-term care insurance to protect their wealth, and Otar said he would have included the insurance in his models if he had seen the specific terms of the contract. His plan leaves the value of the second home untouched, so there’s room to absorb uncovered health care costs.

Otar considers this type of work-up to resemble one of the rough drafts of a retirement income plan. “I would use these scenarios as discussion points with the client,” he told RIJ. “In many situations in my practice, once I discuss multiple options with the client, then a clearer solution develops over time.”

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© 2017 RIJ Publishing LLC. All rights reserved. 

Advisors could lose autonomy as a result of regulation: Cerulli

Many brokerage executives believe that home-office discretion will increase as underperforming advisors are identified and persuaded to use portfolios created by the headquarters consulting group, according to the latest research from Cerulli Associates.

“The DOL Conflict of Interest Rule poses risk to a firm if sponsors knowingly allow advisors to manage underperforming portfolios for clients when a better-performing portfolio with a similar risk level is available from the home office,” said Tom O’Shea, associate director at Cerulli, in a release this week.

“As firms add compliance and monitoring capabilities to their rep-as-portfolio manager (RPM) platforms, they are finding that several advisors do a poor job of steering client assets.”

More than two-thirds (68%) of advisors rely on themselves or their practice to help them with portfolio models. Only a minority of advisors look outside their practice for input. Advisors typically look for ideas from their own advisor team rather than a home-office or a third-party strategist.

“Many advisors are emotionally invested in managing their clients’ portfolios and will resist their firms’ coaxing to use third-party models,” said O’Shea. “They have worked hard to acquire certifications such as the CIMA, CFA, or CFP designations. Asking them to outsource portfolio construction and management to a third party is tantamount to questioning their purpose in life.”

Cerulli believes that if managed account firms want to increase outsourcing, they need to introduce it as a compelling alternative for growing an advisory practice. These findings are from the August 2017 issue of The Cerulli Edge – U.S. Edition, which explores how practice management programs, outsourcing portfolio construction, and a value proposition help advisors become more productive.

© 2017 RIJ Publishing LLC. All rights reserved.

Dealing with the Contradictions of Financial Advice

About two decades ago, when Francois Gadenne left the professional ranks of financial services and became a high-net-worth consumer of retirement planning advice, the founder of the Retirement Income Industry Association noticed that the advice he received was inconsistent and sometimes even contradictory.

Under such circumstances, how could a client become well-informed about income planning, and how could he or she decide what the best strategy might be? And, if there are no bedrock principles or unified theories of retirement income planning, what can an advisor recommend with any degree of confidence?     

This problem bothered him 20 years ago, and it still bothers him. A big part of RIIA’s mission, especially after it developed the RMA (Retirement Management Analyst) designation for advisors, has been to establish a “body of knowledge” and “best practices” in the field of retirement income planning.

Easier said than done. RIIA’s eclectic group of members, including some from the world of public policy and broad solutions for aging populations, and some from the profession of advising high-net-worth, tax-averse clients, could not agree on best practices. Some hated annuities, for instance. Others liked annuities but differed strongly on the timing of annuity purchases. 

Gadenne raised this issue during his presentation at RIIA’s 2017 Summer Conference in Salem, Mass., three weeks ago. And he included several of the contradictions in the book that he and advisor Patrick Collins published as a study guide for the conference.

Equities and Hamlet

We’re all familiar with some of the common contradictions in financial planning. For instance, we’re told that the market’s past performance is no indication of its future returns. Yet most projections of likely future returns depend on analyses that rely, in one way or another, on price history.

There are even more controversial contradictions. Jeremy Siegel and many others have told us that stocks pay off in the long run. And we often follow that principle. Anyone who accepts the “bucket” method of retirement income planning knows that clients should put small-cap equity funds in the bucket they won’t tap for two decades or more—as if small-cap equities were a type of wine that matures to perfection after 20 years.

But Zvi Bodie and others say that this is nonsense, just as it is nonsense that an infinite number of monkeys, etc., could ever produce the text of Hamlet. Stocks are more volatile than bonds, and their volatility only compounds over time. “Time, on average, decreases risk over the population average; but, for any given individual, time increases risk. [This] may temper the inclination to advise a client to hold equities if they have a long planning horizon or to hold bonds if they have a short-term planning horizon,” wrote Gadenne and Collins in the conference handbook.

The concept of “utility”—always a puzzle to this writer—is another source of disagreement among retirement income specialists. By definition, it is the amount of satisfaction that a person gets from something—such as a larger portfolio, a better physique or a child on the Dean’s list.

Investment-focused advisors might think of utility purely in terms of wealth and what a client is willing to give up for it (like safety). An advisor who uses behavioral economics might think of utility in terms of achieving emotional or spiritual goals in addition to financial goals. The question becomes: Should the advisor try to make the client richer, or happier? The implications for the retirement planning process are profound.

Other contradictions are easy to find. There is the index-versus-active management conflict, the disagreement over liquidating tax-deferred assets first or last during retirement, the insurance versus investment products dispute, the leverage-home-equity/ignore-home-equity conflict. There’s the question: Does “bucketing” work as a risk management technique, or is it just “mental accounting”?

The match game

RIIA has a big-tent kind of membership philosophy, and Gadenne doesn’t take sides in these controversies. But he assumes that advisors do, and he’s come to the conclusion that they follow three basic schools of thought. As he and Patrick Collins wrote in the latest issue of Investments & Wealth Monitor, the magazine of the Investment Management Consultants Association (IMCA), most advisors will either be “Curves,” “Triangles,” or “Rectangles.”

By these geometric symbols, respectively, he and Collins refer to advisors who focus primarily on investment management and who rely on Modern Portfolio Theory as a guiding principle; advisors who incorporate behavioral finance into their advice and align investments with their client’s personal goals and aspirations; and advisors who incorporate all of a household’s assets and liabilities into each retirement income plan.

Smart advisors will match the right techniques to the right client, or specialize in certain techniques and certain types of clients, Gadenne believes. “This is not a problem of Truth and Proof,” he wrote in an email. “It is a problem of measurement (of outcomes) and fit (to a specific client type).

“The remedy described in our paper seeks to associate prescriptions with descriptions (of specific clients type to whom it applies), We ask the advisor, “Can you describe the ideal client for this (prescriptive) recommendation?”

© 2017 RIJ Publishing LLC. All rights reserved.

An Obama-era retirement savings initiative gets the ax

The Treasury Department has ended the Obama administration’s MyRA plan program, citing its expense. The decision came not long after Congress voted to undo an Obama-era rule that would have made it easier for states to sponsor automatic workplace retirement savings plans for workers whose employers who didn’t offer the plans.

Both initiatives—MyRA and the state plans—were aimed at solving a big problem: At any given time, only about half of U.S. workers have access to a payroll-deferral, tax-deferred savings plan at work. If more workers could save for retirement at work, the Obama administration believed, they would be less likely to need support from Medicaid in their old age.

The program aimed to work in support of private industry, not against it. Under the MyRA program, workers could save up to $15,000 in Roth IRAs. To relieve small savers of market risk, contributions would be placed in U.S. Treasury bonds.

When account balances reached $15,000, a level at which they would be large enough for financial services firms to service economically, the assets would be rolled into private-sector brokerage IRAs and invested in diversified mutual funds. 

Demand for the accounts over their first 18 months was not high enough to justify their expense to the government, said Jovita Carranza, the U.S. Treasurer, in press release. The MyRA program has cost a reported $70 million since 2014 and would cost $10 million annually going forward.

Participants in the program will receive an email on Friday morning alerting them of the closure. Participants can roll the money into a Roth individual retirement account, the Treasury Department said.

Using an idea developed by policy experts Mark Iwry of the Brookings Institution (an Obama Deputy Treasury Secretary from 2008 to 2016) and David John (then of the Heritage Foundation, now at AARP) President Barack Obama ordered the creation of these “starter accounts” three years ago.

They became available at the end of 2015. Since then, about 20,000 accounts have been opened with participants contributing a total of $34 million, according to the Treasury, with a median account balance of $500. An additional 10,000 accounts have been opened but their owners have not made contributions.

The goal of MyRA was to encourage saving, especially among lower-income and minority workers who work at small companies that are less likely to offer retirement plans. Workers could transfer up to $5,500 (or $6,500 if they were age 50 or older automatically from their paychecks, or they could transfer funds to a MyRA from their checking or savings accounts.

The funds were invested in United States Treasury savings bonds, which paid the same variable rate as the Government Securities Fund, available to federal employees through the government retirement plan. There was no minimum deposit and no fees.

A group of Democrats in Congress recently asked Treasury Secretary Steven Mnuchin to support the MyRA program. The program became even more important, they said, after Congress voted to reverse two Obama-era rules that would have made it easier for states to sponsor low-cost workplace savings plans for workers whose employers didn’t offer them. Oregon, California and Illinois are still moving ahead with those plans.

© 2017 RIJ Publishing LLC. All rights reserved.

Three 401(k) providers take aim at Vanguard and Fidelity

American Funds, Empower Retirement and Voya are trying to take market share away from Fidelity Investments and Vanguard in the 401(k) market, according to Retirement Planscape, an annual Cogent Reports study by Market Strategies International.

“While Fidelity and Vanguard have historically dominated the recordkeeping market… the three challenger brands are gaining ground by increasing their consideration potential for new business,” a Cogent release said this week.

Only 15% of plan sponsors say they are thinking about a change in providers in the next year. But American Funds, Empower Retirement and Voya are now joining Fidelity and Vanguard on plan sponsors’ short-lists of potential recordkeepers.

Voya and American Funds are gaining ground in the micro-plan market (under $5 million in assets), while Empower Retirement—under former Fidelity COO Robert Reynolds and other former high-ranking Fidelity managers—is trying to take business from Fidelity and Vanguard in mid-sized ($20 million to $100 million) and large plans ($100 million to $500 million).

Fidelity and Vanguard both have internal sales teams and can tailor their sales and service methods to each segment. Voya has an internal institutional sales team but also sells plans through advisors. [Voya, Empower and American Funds] “have successfully leveraged their advisor networks to reach smaller plans, while empower has made significant investments in technology infrastructure to appeal to the larger end of the market,” said Linda York, senior vice president at Market Strategies and coauthor of the report.

The needs of plan sponsors often vary according to the size of the plan, York said. Micro plan sponsors look for value and trustworthiness while small to medium plans seek greater choice and flexibility with investment options. Large and mega plans hone in on best-in-class participant service and support.

Cogent Reports conducted an online survey of a representative cross section of 1,422 401(k) plan sponsors from March 22 to April 17, 2017. Plan sponsor survey participants were required to have shared or sole responsibility for plan design, administration or selection and evaluation of plan providers or for evaluating and/or selecting investment managers/investment options for 401(k) plans.

© 2017 RIJ Publishing LLC. All rights reserved.