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Goodbye HelloWallet. Hello, United Income

Posted on September 14, 2017 by -

Matt Fellowes, who founded HelloWallet in 2009 and sold it to Morningstar in 2014 for $52.5 million, has launched a new, web-based, hybrid digital money management solution “for people near or in retirement.” The new firm, United Income, raised $5.8 million in capital in 2016 and gathered $200 million in assets during a private beta launch, according to release this week.

An SEC-registered investment adviser open to clients in all 50 states, United Income offers a free financial plan, including advice on retirement age and Social Security claiming.

Membership starts at 0.50% annual fee on assets under management for self-service financial planning, investment management, and the retirement paycheck and goes up to 0.80% for unlimited access to a personal financial advisor and concierge service.

“United Income offers holistic financial planning and investment management aimed at extending the life and potential of money,” the release said. “It examines millions of potential future market and life outcomes, creating personalized projections of future changes in spending on health and other items.”

Fellowes claimed that United Income’s financial planning methodology and investment recommendations can increase the average 64 year-old’s chance of having enough money in retirement to 65.1% from 9.4%, compared to other low-cost retirement income solutions.

United Income has been advised by the former Commissioner of the Bureau of Labor Statistics, Director of Policy Research at the Social Security Administration, Deputy Assistant Secretary of Treasury in charge of tax policy, Deputy Chief of Staff at the Centers for Medicare and Medicaid, and Senior Advisor to the Secretary of the Treasury, among others, the release said.

Services on the United Income platform include:

Budgeting and Spending.  These services are designed to help members determine how much they can spend annually, recognizing that household spending can fluctuate by as much as 50% year-to-year in retirement. United Income uses custom models to provide personalized projections to members for essential expenses, health expenses, lifestyle expenses, and charitable giving or inheritance planning.

Investment Management. These services are designed to help members make investment decisions to better enable them to reach their goals, even creating a custom investment strategy for each spending need. United Income’s investment management approach also integrates automatic rebalancing and tax optimization.

Financial Planning. These services consider millions of potential life and market outcomes to build personalized plans that aim to maximize the probability of achieving as many of an individual’s retirement needs and goals as possible. This includes recommendations on retirement age, Social Security claiming age and strategy, and more.

Account Sequencing. This service is designed to help retired members lower their taxes and improve investment returns by helping to determine which account to withdraw money from and when.

Retirement Paycheck. This service aggregates different retirement income streams to provide members with a monthly paycheck, so they know how much they have to spend and can budget to that amount – just as they did during their working lives.

In addition, “Concierge Services” will enroll members in Social Security and Medicare benefits. “United Income will also curate opportunities for users to pursue their hobbies, passions and dreams, including volunteering opportunities and obscure adventure trips,” the release said.

© 2017 RIJ Publishing LLC. All rights reserved.

Fixed annuities outsell variable in second quarter: IRI

Posted on September 14, 2017 by -

Industry-wide annuity sales totaled $50.4 billion in the second quarter of 2017, up 2.4% from $49.2 billion in the first quarter but down 9.8% from $55.9 billion in the second quarter a year ago, according to the Insured Retirement Institute, Beacon Research, and Morningstar, Inc.

Variable annuity total sales were $23.7 billion in the second quarter of 2017, up 1.7% from $23.3 billion in the prior quarter and down 10.2% from $26.4 billion in the second quarter of 2016, according to Morningstar.

Fixed annuity sales during the second quarter of 2017 rose to $26.7 billion, up 3.1% from $25.9 billion during the first quarter and down 9.5% from $29.5 billion during the second quarter of 2016, according to Beacon Research.

The increase in total fixed annuity sales was led by sales of fixed indexed products (FIA) and income annuities. FIA sales rose 10% to $14.9 billion from $13.6 billion in the first quarter of 2017. Sales were down 7.1% from $16.1 billion in the second quarter of 2016, however. Sales of income annuities rose to $2.8 billion, up 11% from $2.5 billion in the first quarter.

Combined sales of book value and market value adjusted (MVA) annuities were $9.0 billion, down 7.7% from $9.8 billion in the first quarter and down 8.9% from $9.9 billion in the second quarter 2016. For the entire fixed annuity market, there were approximately $15.1 billion in qualified sales and $11.6 billion in non-qualified sales during the second quarter of 2017.

Variable annuity net assets rose 1.8% to $1.98 trillion during the second quarter of 2017, according to Morningstar. On a year-over-year basis, assets increased 5.1%, from $1.88 trillion at the end of the second quarter of 2016, as positive market performance offset lower sales and negative net flows.

Net flows in variable annuities were negative $14.8 billion in the second quarter. Within the variable annuity market, there were $15.3 billion in qualified sales and $8.4 billion in non-qualified sales during the second quarter of 2017. Qualified sales fell 1.8% from first quarter sales of $15.6 billion, while sales of non-qualified variable annuities rose 8.6% from first quarter sales of $7.7 billion.

“While total variable annuity sales rose slightly,” said John McCarthy, Senior Product Manager at Morningstar, “the largest increases were in non-qualified sales. We are also seeing growth in newer investment-oriented products such as structured annuities. These products offer tax deferral, growth potential and downside protection, and the ability to selectively convert account value to guaranteed lifetime income.

“Sales of structured variable annuities are on the rise, climbing to $1.6 billion in the second quarter of 2017, or 6.7% of total variable annuity sales, as compared to $1.2 billion, or 4.5% of sales, in the second quarter of 2016.” AXA, Brighthouse and Allianz Life are prominent sellers of structured variable annuities.

© 2017 RIJ Publishing LLC. All rights reserved.

A heads-up from Wagner Law on the fiduciary rule

Posted on September 14, 2017 by -

The Boston-based Wagner Law Group issued the following alert this week:

The DOL recently proposed to extend the transition period by 18 months (i.e., from January 1, 2018 to July 1, 2019) for the full implementation of the Best Interest Contract Exemption (“BICE”), the Principal Transactions Exemption, and PTE 84-24 (relating to sales of annuities and other transactions involving insurance companies and agents) (collectively, the “Exemptions”). The proposal, published in the Federal Register on August 31, 2017, is subject to a 15-day comment period.

We think it is highly likely that the DOL will finalize the proposal (although changes to the proposal are possible). The DOL stated that the Impartial Conduct Standards that are currently in effect will continue to be the sole conditions for the Exemptions during the extended Transition Period (i.e., the period in which the exemption is available but compliance with the full conditions of the exemption is not necessary).

Briefly, the Impartial Conduct Standards require that the financial institution and its advisors:

(1) Act prudently and in the best interest of the retirement investor without regard to the financial institution’s or advisor’s interests,

(2) Charge no more than reasonable compensation, and

(3) Do not make misleading statements.

If you are in compliance with those standards now, the proposed extension does not otherwise increase or extend your liability. 

However, we note that it is unclear if the DOL will extend its current temporary enforcement policy on the Exemptions. The DOL previously stated that it would not take action against financial service providers for failing to comply with the Exemptions as long as they were “working diligently and in good faith to comply with the fiduciary duty rule and exemptions” during the Transition Period, which was then scheduled to end on January 1, 2018.

In its recent proposal, the DOL asked for comments on whether to continue with this approach, suggesting that the DOL has not yet decided how to handle enforcement of the Impartial Conduct Standards.

What Do I Do Now? In this environment, a critical and bottom-line question for financial advisers and financial institutions is “What do I do during the Transition Period?”

For all its many faults, the Exemptions, especially the full BICE, provided compliance professionals with a long checklist of specific compliance items. The Impartial Conduct Standards are somewhat more vague and do not necessarily lend themselves to easy compliance checklists. 

Below is a non-exhaustive list of steps that financial institutions and financial advisors can take to protect themselves and demonstrate compliance with the Impartial Conduct Standards during the extended Transition Period, or at least until it becomes more clear what the compliance landscape will look like after the Transition Period is over. Although no single step listed below is required by law or regulation, we think it is important for financial advisers and institutions to take some steps to implement and enforce the Impartial Conduct Standards. 

  • Identify and code all retirement investors as ERISA Plans, non-Title I Plans, IRAs, etc. This will help the firm to track disclosures, procedures, etc., that apply to each type of retirement investor.
  • Make sure written policies and procedures for ERISA and other qualified retirement accounts such as IRAs and similar accounts (e.g., Archer Medical Savings Accounts, HSAs, Coverdell Educational Savings Accounts, Keogh plans, and sole proprietor 401(k) plans) incorporate the Impartial Conduct Standards and require compliance with those standards in making recommendations to retirement accounts. Periodic compliance training for advisors may be appropriate. Compliance manuals and written supervisory procedures (as required by FINRA Rule 3120) should be reviewed and updated.
  • The Fiduciary Rule became fully applicable on June 9, 2017. If not already done, consider revising agreements to make clear the services for which the firm is and is not acting in a fiduciary capacity. Any registered representatives of broker-dealer firms should be licensed as investment advisor representatives, if not done already.
  • Implement processes and controls for the delivery of non-fiduciary services to ensure that fiduciary advice is not inadvertently provided. 
  • If not already completed, review compensation structures and revenue streams to identify any potential conflicts.
  • Implement steps to review recommendations to retirement accounts and conduct surveillance to ensure compliance with the best interest standard.
  • Review advisor compensation for recommendations to retirement accounts to ensure that it is reasonable in the context of your financial institution as a whole. 
  • Consider reviewing corporate compensation and individual advisor compensation against market benchmarks to understand where corporate and individual compensation is set compared to the market. Documenting the benchmarking process is important.
  • Review use of proprietary products and investments that generate third-party payments in retirement accounts to make sure use of such products is consistent with the best interest standard. 
  • Review all sales and marketing materials and disclosures with a view to identifying and eliminating any statements that could be viewed as misleading or inadvertently deemed to constitute a fiduciary recommendation.
  • Review disclosures for retirement accounts to ensure that disclosures are accurate and fairly inform retirement investors of direct and indirect compensation received by the firm and its advisors and potential conflicts of interest. 
  • IRA rollovers are clearly a point of concern for the DOL and, to the extent the firm advises individuals on IRA rollovers, that activity should be treated as a fiduciary activity unless it can be clearly and conclusively established that the firm’s role is purely informational.  
  • Although internal documentation is not a technical requirement at the moment for IRA rollovers (and rollovers of similar accounts such as Archer Medical Savings Accounts, HSAs, etc.) under the BICE’s level fee exemption, firms should nevertheless consider maintaining records in support of the rollover decision.
  • Make sure appropriate persons (such as the CCO, General Counsel, or their delegates) are made responsible – and do so by formal, written appointment – for overseeing compliance with the Impartial Conduct Standards.
  • Consider reviewing how onboarding of discretionary accounts are handled. Under the fiduciary rule as currently in effect, what was formerly considered to be sales activity could be viewed as an investment recommendation to retain the firm for discretionary services. Use of “BICE for a Day” type language (minus the private right of class action lawsuit) in new or existing agreements could help cure this. Although this is not necessarily a point of emphasis for the DOL, it should not be ignored. 
  • Review existing fiduciary insurance and E&O policies to ensure persons responsible for compliance with the Impartial Conduct Standards are covered for the discharge of their duties. In addition or alternatively, these individuals may be indemnified by the financial institution.  

Best Effort Compliance. The DOL, IRS and SEC will continue to share audit information and make cross-referrals under existent inter-Departmental protocols. Regardless of the stated enforcement position of any of these regulatory bodies, a demonstrated effort to meet the Impartial Conduct Standards during this Transition Period (whether it ends in 2017 or extends to a later date as currently proposed) will be a powerful factor in a finding of compliance for the financial institution. The presence of well-documented client files, formally adopted processes and procedures, evidence of attempts to adhere to such processes and procedures, and internal compliance training will be among the most impactful factors to demonstrate efforts to comply with the Impartial Conduct Standards.

© 2017 Wagner Law Group.

Honorable Mention

Posted on September 14, 2017 by -

By any other name, annuities would smell sweeter

Three-quarters of Americans want guaranteed lifetime income, but less than half (46%) know that annuities can provide this feature, according to a new report from Jackson National Life and the Insured Retirement Institute.

The report, The Language of Retirement 2017: Advisor and Consumer Attitudes Toward Securing Income in Retirement, is based on a March 2017 survey of 1,000 consumers age 25 or older with at least $10,000 in retirement savings, along with several hundred annuity owners and financial professionals. 

More than 80% of advisors say that guaranteed lifetime income product features have had a positive impact for their clients, and one-third say it is the most impactful feature of annuities. Further, a 90% of all consumers who responded, and 95% of those 35 to 44 years old, are very or somewhat interested in receiving lifetime income.

While 63% of advisors recommend annuities to their clients, only one in four respondents age 45 and up plan to purchase an annuity.

More than half of the financial professionals surveyed believe at least some of their clients who do not own annuities will run out of money during retirement. More than half of advisors said they have had clients who exhausted their financial resources, mainly because of overspending and/or health care costs.

Of advisors who responded, 61% believe negative client perceptions of annuities present a barrier. Almost half of advisors say their clients believe annuities are too expensive.  

Additional key highlights of the study include:

  • Younger consumers express greater interest in the income features annuities provide compared to older respondents;
  • Eight in 10 consumers say they do not believe Social Security alone will provide them with sufficient income in retirement;
  • Only 21% of consumers expect a pension to provide them with significant retirement income;
  • Four in 10 consumers believe their personal retirement savings will be their most significant source of retirement income; and
  • Two-thirds of consumers believe it is very or somewhat likely that their retirement savings will be significantly affected by a health event.

How to put Bitcoin in your IRA

BitcoinIRA.com, a firm that allows investors to purchase Bitcoins and other crypto-currencies for their IRA or 401(k) retirement accounts, announced this week that it has begun offering Litecoin (LTC), Ethereum Classic (ETC), and Bitcoin Cash (BCH) for investment.

The service includes setting up a qualified cryptocurrency account, rolling over funds from an existing IRA custodian, executing a live trade on a leading exchange and then moving funds into BitGo, a secured multi-signature digital wallet. Individuals can roll over retirement funds into whole coins or into a percentage of each.  

BitcoinIRA.com now offers six coins for investment: Bitcoin, Ethereum, Ethereum Classic, XRP, Litecoin and Bitcoin Cash. BitcoinIRA.com first offered altcoin Ethereum (ETH) in April of 2017 and released XRP (Ripple) in August.
“We’re excited to offer our customers the chance to capitalize on this technology and build a retirement portfolio with Bitcoin and altcoins,” said Chris Kline, chief operations officer at BitcoinIRA.com. Based in Los Angeles, Bitcoin IRA is privately funded.

Robo-advice audience will grow almost ten-fold: Aite  

The U.S. digital advice market is growing fast, with the number of robo-advice clients projected to reach 17 million by 2021, up from 1.8 million in 2016, according to “U.S. Digital Advice: Consolidation, Fee Disruption, and the Battle of the Brands,” a new report from Aite.

The report measures consolidation in the U.S. digital advice sector and describes the battle between major financial brands over new subscription models for pricing wealth management services. The report tries to answer some basic questions that impact the global trend:

  • How is the adoption of digital advice set to grow in terms of accounts and AUM over the medium term?
  • And which firms have a competitive edge amid this growth?

Based on research conducted from August 2016 to July 2017, the report includes a series of structured and unstructured interviews with executives at leading firms in the digital advice industry as well as the analysis of public filings.

Firms mentioned include Acorns, Ally Invest, Alpha Architect, AssetBuilder, Bank of America, BATS, Betterment, BlackRock, blooom, Charles Schwab, Covestor, Edelman, Ellevest, E-Trade, eSavant, Global Trading Systems, Fidelity Investments, Future Advisor, Hedgeable, Invesco, Merrill Edge, Morgan Stanley, Nasdaq, New York Stock Exchange Arca, Personal Capital, Pimco, Raymond James, Rebalance IRA, Ritholz Wealth Management, Scalable, State Street Global Advisors, Sigfig, SoFi, TD Ameritrade, T. Rowe Price, The U.S. Securities and Exchange Commission, UBS, VanEck, Vanguard, Wealthfront, Wela Strategies, Wells Fargo, Wise Banyan, and WorthFM.

Aite Robo Chart 9-14-17

AXA to collaborate with noted gerontologist

AXA will collaborate with gerontologist Sandra Timmermann, Ed.D., to deliver training around aging issues, including offering client seminars and creating training materials for financial professionals and informational packets for clients, the insurer announced this week.

Dr. Timmermann’s areas of expertise include retirement life stage issues and connecting the dots between aging at home and long-term care protection. She covers subjects ranging from retirement finances, family needs and intergenerational relationships, housing and aging in place, long-term care and other transitional topics.

Timmermann founded the MetLife Mature Market Institute and has held senior staff positions with several aging organizations including the American Society on Aging, AARP and SeniorNet. She is currently a visiting professor of gerontology at the American College of Financial Services and writes the financial gerontology column for the Journal of Financial Service Professionals.

Women worry more about personal finance than men: MassMutual

While Middle American men and women share similar feelings of financial security, women are more likely to worry about their personal finances and with good reason: they are three times more likely to say they cannot afford to save for retirement, according to a new study from Massachusetts Mutual Life Insurance Co. (MassMutual).

Four in 10 women (39%) and 35% of men with annual household incomes of between $35,000 and $150,000 report feeling “not very” or “not at all” financially secure, according to the 2017 MassMutual Middle America Men & Women Finances Study (Men & Women Finances Study). The internet-based study polled 1,010 middle-income Americans and finds men and women have different saving habits, especially when it comes to retirement. The study is being released to mark 401(k) Day on Sept. 8.

One in two women (51%) say they worry at least once a week about money compared to 45% of men, according to MassMutual’s Men & Women Finances Study. Women are also more likely to bring those worries to work while men are twice as likely to say they never worry about money, the study finds.

He saves, she saves

Men and women differ in their approaches to saving money, especially when it comes to retirement. Both genders overwhelmingly agree they are not saving enough for retirement (74% women; 71% men) but men tend to be more confident when it comes to being financially secure when they eventually retire.  Nearly half of Middle American women (47%) say they are “not very” or “not at all” confident about being financially secure in retirement compared to 39% of men, the study shows.

Women worry with good reason.  Forty-four% of women in Middle America report they cannot afford to save for retirement compared to 14% of men, according to the study. One in four women says they don’t save because their employer either doesn’t match retirement plan contributions or doesn’t offer a compelling match. Twenty-one% of men say the same, the study finds.

Only two in 10 women report having $10,000 or more in savings for financial emergencies compared to three in 10 men, the study reports.  Seventy-three% of women who are not saving for anything other than retirement say all of their income goes towards monthly expenses and bills; 62% of men say the same. Women are also less likely than men to use any extra money to pay off debt (38% to 47%, respectively).

When they do save, men and women typically take different approaches. Women are more likely than men to save “whatever is left after expenses” (47% women; 34% men) while men are more likely to save a set amount each month (33% women; 44% men).

The American Association of University Women (AAUW) reported that women typically are paid 80% of what their male colleagues earn for the same job.

He worries, she worries

Women tend to worry more than men about several different aspects of life, especially politics, money and family.

 From day to day, how worried are you about each of the following?

 Men

 Very or somewhat  worried

 Women

 Very or somewhat  worried

 Politics/direction of the country

 59%

 74%

 Your household’s financial situation

 51

 57

 Health and well-being of parents or in-laws

 50

 52

 Personal health

 43

 38

 Health and well-being of children

 30

 40

 Marriage/love life

 22

 21

 Housing situation

 25

 27

 

 

 

Those who worry about money at least once a week report negative implications for their health and well-being, especially women.  Women are more likely to blame financial concerns for stress (59% women; 54% men), hurting their social life (43% women; 37% men), affecting the frequency or quality of their family’s medical or dental care (27% women; 17% men) and negatively impacting their marriage or romantic relationship (30% women; 25% men).

© 2017 RIJ Publishing LLC. All rights reserved.

Bill Sharpe’s ‘Lockbox’ Strategy

Posted on September 7, 2017 by -

Four years ago, the Nobel Prize-winning economist Bill Sharpe started writing a blog to chronicle a pet project. “This is a new blog,” he wrote at the time, “on which I plan to post material on creating and analyzing ranges of scenarios for retirement income using different strategies for investing, spending and annuitizing retirement savings.”
That blog is now an e-book, called “Retirement Income Scenario Matrices” or RISMAT. The 21 free, download-able chapters comprise two books braided into one: a manual for writing retirement income planning software and a more accessible, and often amiable, explanation of the philosophy behind the code.
As you might expect from Sharpe, one of the giants of Modern Portfolio Theory, the co-creator of the Capital Asset Pricing Model and the originator of the eponymous Sharpe ratio, this retirement how-to can rely on market history for its assumptions (or not, according to each user’s preference) and uses Monte Carlo simulations for its probabilistic recommendations.

Illustration from RISMAT

But, surprisingly perhaps, this disciple of Harry Markowitz also takes a deep dive into annuities. The big tail risk in retirement, his approach implies, is not market risk but longevity risk. “Annuities are a potent and sensible instrument,” he told RIJ in a recent interview from his home in Carmel, Calif.
Many others have written software for retirement income planning. Sharpe himself has written papers on this topic before. So have the quants at Financial Engines, the 401(k) robo-advice firm he co-founded in 1996. This lengthy e-book, is written in a voice both technical and personal. It sums up the 83-year-old economist’s vision for the future of retirement income planning. Along the way, he brainstorms new ideas for life insurers, financial mathematicians, coders, broker-dealers, advisors and even individual retirees.
Notional “lockboxes”
The algorithms (written in MathWorks’ MatLab software) that Sharpe describes in this book may be rocket science, but anybody familiar with time-segmented income planning, aka “bucketing,” should feel at home with what he calls a lockbox approach, one of several that he prefers to the 4% “safe withdrawal” rule.
In one chapter, Sharpe divides retirement into two periods. During the first period, starting at the retirement date, a retired couple takes withdrawals from an investment portfolio. In one of his examples, the first period lasts 19 years and consumes 64% of savings. In the second period, if the retirees are still living, they buy an income annuity with the remaining 36%.
Each year of the systematic withdrawal period is represented by a “lockbox.” Each lockbox contains a certain portion of Treasury Inflation-Protected Securities and a share in an investment portfolio consisting of ultra-low-cost total market stock and bond index funds.
“The idea is to provide the discipline to say to yourself, ‘I will only cash the number of shares in this year’s lockbox,’ he said in an interview. “Obviously, the lockboxes aren’t really locked. If you have an emergency, you can take money out. You still have the key.”
The asset allocation depends on the client’s risk appetite or capacity. “For implementation, you’d buy a certain number of TIPS, and a certain number of mutual fund shares,” Sharpe told RIJ. “You build a spreadsheet with one column for the initial amount in TIPS and another column for the amount in a risky portfolio. Then you would multiply the number of TIPS and shares for each lockbox by their current values and figure out what they’re worth in each period. Once a year, you would sell off that year’s portions of the two at their current price. It’s an accounting/spreadsheet task.”
In the 20th year of retirement—which in this example roughly corresponds to the average American’s life expectancy—the couple, if living, buys a joint-and-survivor fixed life annuity. For the sake of liquidity, flexibility, and cost-reduction, they might prefer to make the annuity purchase an option, rather than buying an immediate or deferred annuity at retirement.
That’s a layperson’s description of Sharpe’s approach. Underneath the hood, the software relies on programmed assumptions about growth and inflation, incorporates variables about life expectancies and volatility, estimates present values, and uses Monte Carlo simulations to help identify the strategies that are most likely to bring a desired outcome.
[His software includes a valuation model so one can find present values of possible future payments to retirees and their estate. It also can compute costs of taking sequence-of-returns risk.]
Sharpe believes in this technique, but he admits its limitations. “Overall, the results of our exercise are depressing. Even if we were able to obtain a substantial history for the true market portfolio and if its returns had all been drawn from the same probability distribution every year and if future returns will be drawn from the same distribution, we could still make major errors when estimating parameters for the future distribution.
“And the reality is likely to be even worse. Political affairs, technology, communications, financial markets and financial economics have all changed radically over the last several decades. And they will undoubtedly change substantially in the future. When estimating future return distributions, humility is very much in order.”
A retirement ‘family doctor’
In this book, Sharpe anticipates a future when life insurers, RIAs (registered investment advisors), advisors and retirees might use Sharpe’s software or something like it to create new products and processes and even to overcome some of the behavioral barriers to retirement income planning.
“I would love to see a product called lockbox annuities,” Sharpe told RIJ. “This would be an annuity in which the insurer would hold the lockboxes. The customer would tell the insurer, for example, ‘Here’s what I want in my year 2020 lockbox. Here’s the amount of TIPS I want and here’s the amount of market portfolio.’” The client would bear the market risk and reap mortality credits. “It wouldn’t cost much for the distant lockboxes. You might only pay 10% of what you would need.”
RIAs are already using homemade or licensed retirement planning software, and Sharpe hopes to see more of that. “In a small firm, there could be one or more technology specialists with detailed knowledge of the software’s functions and the ability to adapt or augment them to include additional income sources…
“The person or persons working directly with clients could focus more on communicating possible outcomes, helping the clients understand the options, then implementing some or all of the chosen approaches. Such a ‘family retirement doctor’ could help each client or pair of clients understand relevant graphs, discuss alternatives, then make informed choices. 
The book also contains something for individuals. Sharpe recognizes that many retirees avoid talking about annuities or income because it forces them to contemplate their own mortality. “That’s the first hurdle: Talking about death,” he said. He thinks that his software could help retirees “think about what nobody thinks about.”
“I like the idea of sitting down and saying, ‘If I’m alive 20 years from now, and if I’ll need x amount of dollars in order to live reasonably well, what strategy should I have for that year? And if I don’t make it, do I leave my money to a charity or my children? Or do I buy an annuity, have more money and leave nothing? Or some combination of the two” he said.
“The hardest thing to think about is the issue of mortality. The lock box concept helps you think about that and can give you a cost-efficient strategy for each year. Behaviorally, it makes you think seriously about the future.”
© 2017 RIJ Publishing LLC. All rights reserved.

 

The Time to Buy Annuities is Now

Posted on September 7, 2017 by -

Investors, like George Costanza on ‘Opposite Day,’ should never trust their own instincts. In 1975, when they should have stocked up on cheap stocks (as a guy named Buffett did), they wouldn’t touch equities. In 1999, when people should have dumped tech stocks, the dot.com mystique held them transfixed.

So it is today. Boomers should be buying guaranteed income products and treating equities like (excuse the near-anachronism) overdue library books. They should take the profits that the Fed has showered on them since 2009 and lock the gains into personal pensions.

But they aren’t. As LIMRA’s Secure Retirement Institute reported two weeks ago, annuity sales at mid-2017 were at the lowest level for a half-year since 2001. For this year, the SRI predicts that variable annuity sales will drop below $100 billion for the first time since 1998, when stocks were up and the 10-year Treasury rate was as high as 5.7%. 

The variable annuity market, which is more accurately a subset of the mutual fund market, should do well when stocks are up, but it isn’t. Indexed annuities, which are supposed to do well when bond yields are down, have seen their fantastic run stalled. Fixed income annuity sales are down too. The annuity marketplace feels strangely quiet, one booth shy of a trade show.

The government is of course partly to blame. The Obama DOL, keen on QLACs but suspicious of VAs and FIAs, put a big chill on those two products. The Trump DOL pushed back the deadline for compliance with the fiduciary rule but didn’t bring annuities in from the cold. (Have you noticed that firings, cancellations, delays and postponements are this administration’s primary policy tools?)

And, of course, annuities themselves are to blame. Sex them up as much as we’d like, insurance is an expense, not an investment. But why do people believe that equities are safer?

There’s a more fundamental obstacle to making annuities more available to their logical buyers: American retirees who have at least a few hundred thousand dollars in savings, who guzzle kombucha and snack on flaxseed to maximize their lifespans, and who lack corporate or public pensions.   

Advisors are both the problem and the solution. The problem is the strong tendency for most financial intermediaries to specialize either in investments or insurance, not both. Once an advisor settles into a product category (risky or guaranteed), regulatory regime (state or federal), theoretical foundation (MPT or the law of large numbers) and revenue model (commission or AUM-based), he or she tends to stick with it.   

Quants and actuaries just don’t hang out much.

To be sure, many advisors have become “ambidextrous.” You can find them among the graduates of RIIA’s Retirement Management Analyst program or The American College’s Retirement Income Certified Professional course. You can meet them here in the virtual pages of Retirement Income Journal. But they’re still a tiny minority. Investors don’t know about them, and don’t know where to look.

Lots of new income-generation tools, processes and algorithms are available for open-minded advisors. Lots of ideas exist for software that can help retirees allocate between risky and risk-free products. Two of those ideas, one from the legendary Bill Sharpe and one from Per Linnemann, a former chief actuary of Denmark, are on display in today’s issue of RIJ (along with three past cover stories in a similar vein). But those ideas aren’t yet popular at wirehouses, and that’s where so many rich people still keep their money.

Boomers need a new income paradigm, and they need it now. A smart, customized blend of investments and insurance products, RIJ believes, is the most efficient way for most people to deal with the many risks of retirement. Few Boomers can afford not to be aware of the synergies that blended solutions can offer–even if they eventually choose, as Curtis Cloke likes to say, just to “assume and consume.”

A series of unexpected events will someday interrupt the long-running, Fed-nurtured bull market. The Buffetts of the world will sweep up bargains, as they always do. But most investors will be left with shrunken portfolios, and millions of near-retirees will regret not locking in guaranteed lifetime income when they had the chance.  

© 2017 RIJ Publishing LLC. All rights reserved.    

Smoother Income, with ‘iTDFs’

Posted on September 7, 2017 by -

Today’s retirement income planning software can’t easily answer questions like, “How much do markets have to decline before I should cut spending in retirement?” or “How much should I reduce my spending in order to get back on track?” For the millions of retirees who feel anxious about market volatility, that’s a significant shortcoming.

My startup company in Denmark, Linnemann Actuarial Consulting ApS, has created algorithms to fill this vacuum. We can provide a smoother retirement income journey, in which withdrawal rates and portfolio asset allocations change automatically in response to investment market developments. This allows individuals and their advisors to co-ordinate their investment, distribution and longevity protection strategies. 

The products based on our method, which we call iTDFs, are hybrids between target date funds (using glidepaths that reduce equity exposure over time) and smoothed income annuities. A life insurance company doesn’t need to be involved. It requires no expensive guarantees or potentially costly derivatives.

The old variable payment and variable-period payment strategies

Let’s consider a few of the problems with traditional variable payment strategies (where payments fluctuate with the markets) and variable-period payment strategies (where the length of the payment stream varies).

First, it can be dangerous to withdraw a specific percentage from your portfolio from year to year (e.g., by using the annuitization method, where the distribution amount is determined by dividing the investment account balance by an annuity factor). Market volatility will cause your income to vary too much from year to year.  

Second, if you practice the famous “4% withdrawal rule” (by spending an amount equal to 4% of your savings adjusted upward each year for inflation), you’ll find that it lacks capital efficiency. You could either spend too much, and run out of money too soon, or not spend enough, and deprive yourself of many of the pleasures of retirement.

There’s a better way. As Jaconetti et al (2013) at Vanguard have pointed out: “If a portfolio is to rely on the capital markets for growth, then investors must either accept continuous, relatively smaller changes in spending or else run the risk of having to make abrupt and significantly larger adjustments later.” That’s what we’re proposing: “Continuous, relatively smaller changes in spending.”

A new approach to investing and spending in retirement

Retirees need to embrace two concepts. The first is income “smoothing.” Incomes should be fairly predictable from year to year. In addition, they need to moderate their investment risk as they age. If there’s a sharp downturn in the financial markets, they may not have time to ride out a downturn or return to work and add to their savings.    

Enter the iTDFs, which combines smoothing with the “glidepath” of TDFs. Investors can use iTDFs to accumulate wealth before retirement and to generate smoother income during retirement, either for a pre-defined period or for as long as they live. The iTDF framework can also be structured to provide a “smoothed” lump sum payment at retirement.

iTDFs give each investor a dynamically self-adjusting glidepath with automatic re-balancing and re-allocation of assets. Metaphorically speaking, we added intelligent shock absorbers and an automatic transmission to existing TDFs. (This concept was described in my article, “iTDFs: ‘Self-Driving’ Retirement Cars,” published in Retirement Income Journal on April 19, 2017.

iTDFs use innovative algorithms that smooth payouts by adjusting to fluctuations in portfolio value. It works in a capital-efficient way: the product doesn’t require an inefficient “buffer” (assets held in a side account to store gains or compensate for shortfalls) and the manufacturer assumes no investment risk.

Although the investment account value may fluctuate significantly in the short term, the formulas dynamically determine an income that won’t fluctuate with market conditions. The formulas also mitigate the risk of sudden market swings close to the retirement date might have on the beginning income. 

Relying on a robust formula-driven framework, iTDFs will fit easily into an increasingly digitalized and mass-customized world. Different versions of iTDFs can be tailored to market conditions and purposes in the U.S., Europe, Australia and Asia. 

How iTDFs work

iTDFs are an innovative savings and retirement concept based on principles that are both simple and robust. Though compatible with Modern Portfolio Theory (MPT) and managed volatility control on the sub-portfolio level, they don’t rely on any capital market model—for example, the (multidimensional) log-normal probability distribution.

In our iTDF products, the full market-linked return is passed on to the investment account of the individual investor during both the accumulation and decumulation periods. The savings in the investment account are allocated between a risky investment fund and a riskless investment fund.

Three factors determine the allocation and re-balancing between the two diversified funds: The client’s risk appetite or capacity, the length of time until the target retirement date (and, subsequently, until the portfolio consists entirely of riskless investments) and the smoothing mechanism.

In the chart below, the y axis represents the percent of the portfolio allocated to risky assets. The x axis indicates the number of years before and after the retirement date. As in so-called “through” TDFs, the shift to an all-riskless asset portfolio occurs long after retirement, not at the retirement date (as in “to” TDFs). As in any TDF, the allocation to risky assets declines gradually with age.

The three lines represent three different “neutral” asset allocations. The allocation is considered neutral when the market value of the assets in the combined risky and riskless investment accounts equals the present value of future liabilities (i.e., the client’s income over the course of retirement).

 Linnemann chart correction 2

Enter the smoothing mechanism. When the value of the assets exceeds the present value of the liabilities, there is room for taking on some more risk and for increasing the proportion of the risky investment fund above the neutral allocation. When the value of the assets is less than the present value of the liabilities, the algorithm increases the allocation to riskless assets. 

Over time, the allocation between the risky investment fund and the riskless investment fund fluctuates around the neutral glide path according to our dynamic self-adjusting asset allocation and rebalancing method. It varies according to market fluctuations, the degree of smoothing, and the relation between the value of the assets and the value of the liabilities.

Both the assets and the liabilities shrink as the client draws income during retirement. During retirement, the smoothing mechanism helps to stabilize the income stream. The secret sauce of our proprietary approach is making all the moving parts work well together. 

Significantly, our iTDF design can accommodate the creation of a family of products with a range of risky assets, various levels of investment risk and different degrees of smoothing. For those who want guaranteed income in the later part of life, we can combine iTDFs with deferred or immediate income annuities.

Appointed Chief Actuary in the Civil Service of the Danish Insurance Supervisory Authority by Her Majesty Queen Margrethe 2nd of Denmark when he was 30, Linnemann has more than 30 years of experience in the life and pension industry. He holds Ph.D. and M.Sc. degrees in actuarial science from the University of Copenhagen. 

© 2017 Per U. K. Linnemann. Used by permission. [email protected]

 

 

Today at 4:15 p.m. ET: Hegna and Rostad debate the DOL rule

Posted on September 7, 2017 by -

Can’t stop thinking about the DOL fiduciary rule, which will still be in limbo two or three oil changes from now?

Then plan to attend today’s 4:15 p.m. webinar/debate between Tom Hegna, the celebrity-advisor (speaking against the rule), and Knut Rostad, president of the Institute for the Fiduciary Standard (speaking in defense of the rule).

The debate is hosted by APViewpoint, the opinion section of Advisor Perspectives, and moderated by AP founder Robert Huebscher. To hear the debate go to this web address. (If you are a member of APViewpoints, the link will take you to the webinar registration page. If you are not a member, the link will take you to a page where you can join APViewpoint.)

In the live, Munk-style debate moderated by Bob Huebscher, Rostad will defend the proposition, “The benefits to investors and society of implementing the DOL fiduciary rule far outweigh the costs.” Hegna will argue against it, covering issues such as:

  • Should the decision to work with an advisor who adheres to the fiduciary standard or the suitability standard be left to investors, rather than the government?
  • Will the rule create administrative burdens and liability risks that will discourage advisors from serving retirement clients?
  • Will registered representatives moving from commission-based to fee-based compensation no longer be willing to take on clients with smaller pools of retirement assets?

Knut and Tom will answer attendees’ questions during the session and will be available to continue the discussion on APViewpoint.

Hegna, CLU, ChFC, CASL, is an industry speaker, author and economist. A retired U.S. Army lieutenant colonel, he has been an advisor, manager and senior executive officer of a Fortune 100 Company. He is the co-author (with Kelvin Boston) of Don’t Worry, Retire Happy: 7 Steps to a Secure Retirement, the basis for a popular PBS TV programs viewed in 50 million homes in the US and Canada.

Rostad is the co-founder and president of the Institute for the Fiduciary Standard, a nonprofit formed in 2011 to advance fiduciary principles in investment and financial advice through research and education. Previously, Rostad served as the compliance officer at Rembert Pendleton Jackson, an investment adviser in Falls Church, Va.

© 2017 RIJ Publishing LLC. All rights reserved.

Roth accounts mystify most participants: Cerulli

Posted on September 7, 2017 by -

Two-thirds of savers have no understanding or a misunderstanding of Roth contributions, according to new research from Cerulli Associates, the global research and consulting firm. Cerulli pointed to the relevance of this finding given the potential “Rothification” of the defined contribution (DC) market through tax reform. 

In a survey this year, Cerulli asked approximately 1,000 DC plan participants to select the data that best described Roth contributions. Only one-third of participants knew that Roth contributions are after-tax, that money in a Roth account grows tax-free, and that withdrawals at retirement are tax-free. 

“The current tax code allows taxpayers to deduct retirement savings and delay paying taxes on traditional accounts—as opposed to Roth–until the savings are withdrawn, thereby encouraging individuals to build a nest egg to fund their retirement,” said Jessica Sclafani, associate director at Cerulli, in a release. “This incentive would no longer exist if tax reform succeeds in Rothifying the DC market and could dramatically change Americans’ retirement savings behavior.”

Given the lack of understanding of Roth contributions, the behavioral challenges associated with taxable contributions and the loss of the immediate tax benefit, or incentive, Rothification could cause some individuals to reduce or cease their contributions to an employer-sponsored retirement savings plan, Sclafani said.

“Cerulli believes that there are some counterinitiatives that recordkeepers and consultants can consider to get in front of tax reform and the potential threats it poses in terms of reducing DC plan contributions,” she added. These included:

  • Implementing the switch to a Roth system on a non-elective basis for participants
  • Emphasizing the power of an employer matching contribution within the context of a Roth system
  • Framing a tax break as a salary raise and an opportunity to increase retirement plan deferrals.

The third quarter 2017 issue of The Cerulli Edge – U.S. Retirement Edition explores assisting age 50+ workers in preparing for retirement, and the potential consequences of Rothifying traditional retirement accounts through tax reform.

© 2017 RIJ Publishing LLC. All rights reserved.

First-half annuity sales drop to 16-year low: LIMRA SRI

Posted on September 7, 2017 by -

Total annuity sales were $105.8 billion in the first half of 2017, a 10% decline compared with the first six months of 2016, according to LIMRA Secure Retirement Institute’s Second Quarter 2017 U.S. Retail Annuity Sales Survey.

First half sales have not been this low since 2001. Regulatory uncertainty over sales of the most widely sold annuities—variable and indexed—has added to slump. In contrast to trends of the past, the rising equities and low interest rates are not contributing to sales in those categories, respectively.

In the second quarter, total annuity sales were $53.9 billion, up slightly from the first quarter but an 8% decline from the year-ago quarter. It was the fifth consecutive quarter of decline in overall annuity sales and the sixth straight quarter in which fixed sales have outperformed VA sales—which hadn’t happened in almost 25 years.

U.S. variable annuity (VA) sales were $24.7 billion in the second quarter, down 8% compared with prior year results. This marks the 14th consecutive quarter of decline in VA sales. Sales from the first half of 2017 VA sales were $49.1 billion—8% lower than the first six months of 2016.

“Qualified VA sales have experienced a more significant decline than non-qualified VAs,” said Todd Giesing, director, Annuity Research, LIMRA Secure Retirement Institute. “VA qualified sales were down 16 percent in the second quarter, while nonqualified sales were actually up 5 percent. This could be in reaction to the DOL fiduciary rule.”

Second quarter qualified VA sales accounted for 58% of retail variable annuity sales, a five-percentage points decline from the same quarter last year.

Sales of fee-based variable annuities increased in the second quarter to $570 million, representing 2.3% of the total VA market. While this is a small portion of the overall VA market, these products have seen continued growth over last year.

Structured variable annuities have also experienced growth. In the second quarter, sales of these products have increased 36 percent, reaching $1.8 billion, which represents 7 percent of the VA market

Institute forecasts VA sales will drop 10-15% in 2017, to less than $100 billion. This has not occurred since 1998.

Fixed annuity sales also declined in the second quarter. Sales were down 7% to $29.2 billion. All fixed product lines sales, except structured settlements, experienced declines. In the first half of 2017, fixed sales fell 11% to $56.7 billion.

Second quarter indexed annuity sales totaled $15.6 billion, a 15% increase from first quarter but are still four percent lower than prior year results. Nine of the top 10 companies have reported quarter-over-quarter growth. The Institute predicts indexed annuity sales will decline 5-10 percent in 2017. 

Fixed rate deferred annuities (Book Value and MVA) sales dropped 11 percent in the second quarter to $9.3 billion. Year-to-date, fixed rate deferred annuity sales were $19.4 billion, 14% lower compared to 2016 results.

In the second quarter, deferred income annuity (DIA) and single premium income annuity (SPIA) sales both experienced declines. DIA sales were down 31 percent to just $600 million. SPIAs were down to $2.2 billion in the second quarter—a 12 percent drop.

The second quarter 2017 Annuities Industry Estimates can be found in LIMRA’s Data Bank. To view variable, fixed and total annuity sales over the past 10 years, please visit Annuity Sales 2007-2016. To view the top twenty rankings of total, variable and fixed annuity writers for second quarter 2017, please visit Second Quarter 2017 Annuity Rankings.

To view the top twenty rankings of only fixed annuity writers for second quarter 2017, please visit Second Quarter 2017 Fixed Annuity Rankings. LIMRA Secure Retirement Institute’s Second Quarter U.S. Individual Annuities Sales Survey represents data from 97 percent of the market.

© 2017 RIJ Publishing LLC. All rights reserved.

Lower expenses and lower taxes put life/annuity industry in the black

Posted on September 7, 2017 by -

Net income for the U.S. life/annuity (L/A) industry in the first half of 2017 rose to $18.5 billion, versus a net loss of $2.6 billion for the same period in 2016, according to a new Best’s Special Report, “A.M. Best First Look—2Qtr 2017 U.S. Life/Annuity Financial Results.”

The significant increase in net income was mainly due to a $45.0 billion drop in total expenses and taxes and a $1.2 billion improvement in realized capital losses, according to the report.

In addition, capital and surplus for the industry increased by $12.2 billion since the start of the year and reached a record $365.6 billion as of June 2017. The significant improvement in net income and a 15.2% reduction in stockholder dividends offset steep declines in unrealized gains and contributed capital.

Large reinsurance agreements undertaken in 2016 and 2017 drove the results.

Total income dropped 7% to $348.9 billion. The reduction in income was further exacerbated by a 40% decline in commissions and expense allowances on reinsurance ceded, again due to the reinsurance agreements.

A 24% increase in other income was not enough to overcome these declines. Despite the drop in income, the reduction in expenses drove pretax net operating gain up 350% over the prior year to $25.3 billion.

The report is based on data derived from companies’ six-month 2017 interim statutory statements that were received by Aug. 21, 2017, representing an estimated 84% of total industry premiums and annuity considerations.

© 2017 RIJ Publishing LLC. All rights reserved.

Two retirement journalists accept new posts

Posted on September 7, 2017 by -

Tamiko Toland has joined Cannex Financial Exchanges as Head of Annuity Research. Cannex is the principal provider of annuity pricing and analytics to the financial services industry. 

Toland will be responsible for product research on the annuity market and contribute to the development of Cannex services. Drawing upon 15 years of experience as a researcher and editor focused on retirement income and annuities, she will provide financial institutions and annuity product manufacturers with insights into product design and trends, Cannex said in a release.  

“As we continue to expand our annuity evaluation and selection services, she will be a resource for clients and the media, as well as our development and client-facing teams,” said Gary Baker, President, Cannex USA.

Toland was most recently Managing Director, Editorial and Research Operations/Retirement Income Consulting, at Strategic Insight, where she managed its Annuity Insight service.  She developed, edited and authored research reports on topics including managed volatility funds and in-plan guarantees.  

Prior to Strategic Insight, she was managing editor at Annuity Market News, a SourceMedia publication that provided industry news on fixed and variable annuities and variable life insurance. Toland frequently speaks at industry conferences. She has also testified as an expert witness and written for the CFA Institute and trade media.

Robert Powell, a journalist known for his retirement expertise, has joined TheStreet, Inc., to write a regular column and to launch a new subscription retirement editorial product for more in-depth coverage, TheStreet announced this week.Bob Powell  

Powell (right), who has written for USA Today and MarketWatch, will cover personal finance and retirement matters for investors and financial advisors. A frequent speaker and moderator, he will also participate in TheStreet’s growing events business, the release said.

“My hope is that readers and subscribers will think of me as their retirement guide, someone who can help them achieve their retirement and investment goals, avoid costly mistakes, learn how to manage and mitigate the retirement risks they face, and create investment portfolios that will last a lifetime,” said Powell.

Prior to joining TheStreet, Powell was author of the popular subscription newsletter “Retirement Weekly” at MarketWatch. He holds a master’s degree in Journalism from Boston University and a bachelor’s degree from Marquette University 

© 2017 RIJ Publishing LLC. All rights reserved.

On the Case: A Solution from ‘Retirement NextGen’

Posted on August 17, 2017 by -

As you may remember from last week’s installment of “On The Case,” Andrew, 64, and Laura, 63, two psychotherapists, continue to wonder how to generate enough retirement income from their $1.24 million in savings. Laura wants to go part-time right away. Andrew is willing to work until age 70, but he’d like to retire earlier.

So far, three advisors have analyzed the case, each using his own proprietary software. Now comes a new analysis by Robert Fourman, CFP, EA of Acuity Financial. Fourman uses the Retirement NextGen software, which he and Curtis Cloke, the well-known founder of Thrive Financial in Burlington, Iowa, developed.  

Fourman encourages Andrew and Laura to annuitize part of their savings and to increase their equity exposure, as did Mark Warshawsky in his ReLIAS software-driven solution, published in RIJ on July 20. Fourman makes a few different assumptions and comes up with a somewhat different solution. He provides detailed projections of the couple’s cash flows and balance sheet.

Andrew and Laura are clearly approaching retirement in better shape than most American couples will. But their expectations are also much higher. They’re accustomed to a gross income of about $300,000. Social Security, a small pension and some rental property income will bring in a guaranteed, inflation-adjusted $114,000 each year. But how much income will they really need, and how should they generate it?   

Quick take-away

Andrew and Laura estimate that they’ll need a gross income of $140,000 in retirement. That’s less than half their usual income, but it reflects the fact that they won’t be contributing $50,000 apiece to SEP-IRAs every year. That leaves a $36,000 annual income shortfall.

Fourman’s proposal would generate $180,000 or more for Andrew and Laura by annuitizing $467,000 of their $1.24 million (producing $35,000 a year for life) and taking sustainable withdrawals from their remaining $773,000, which he expects will grow by about 4% per year. Without the annuity, their money might not last 30 years. With the annuity, they should be able to spend more and tap their investment sparingly.  

Advisor assumptions

  • Andrew and Laura said they needed only about $140,000 per year before taxes in today’s dollars, which is about 70% of their current gross, minus contributions to retirement accounts. Fourman thought the couple was underestimating their needs. He set their income goal at closer to $200,000.
  • Andrew and Laura will both live until age 95. If the client desired, the advisor could model a strategy that assumes that one or the other spouse will die at an earlier date. Such a model would involve adjustments related to personal and medical expenses, taxes and insurance.    
  • The plan aims to produce 80% of the couple’s income from guaranteed sources, and to limit the withdrawal rate from invested assets to 4% per year throughout retirement.
  • Andrew will work full-time until age 69 and Laura will work part-time until age 68. If they delay Social Security benefits to their retirement date, they will each receive about $3,000 per month, minus Medicare premiums.     
  • The plan includes rental income from the couple’s second home as part of their income, to continue indefinitely. Otherwise, the market value of both homes is excluded from the income plan but will be listed as assets after they are paid for. Because both houses are mortgaged, reverse mortgages aren’t considered.
  • Income needs are inflated at the rate of 2% a year. On average, stocks are assumed to yield 5.5% going forward (less one percent in fees) and bonds were assumed to yield 2% going forward (less 50 basis points in fees).
  • Andrew and Laura want to leave at least $500,000 to each of their children.

Advice Points

  • The advisor measures the clients’ risk tolerance by the amount of their monthly income they would like to get from guaranteed sources (as opposed to their tolerance for a one-year drop in market indexes). In this case, without special guidance from the clients, he aims to derive 80% of the couple’s monthly income from guaranteed sources, including Social Security, pensions and annuities.
  • The clients can reach 80% with a combination of Social Security, pensions, rental income, and partial annuitization of their invested assets.
  • The clients can draw the remaining 20% of their income needs from their invested assets at a sustainable rate of about 4% per year.
  • The advisor compared two income options: a variable annuity with a guaranteed lifetime withdrawal benefit and a deferred income annuity with an installment refund. The analysis showed that the payout from the DIA would be higher for these clients, who intend to retire in about six years. To get the maximum value from the VA-GLWB, the client would need to defer income for 12 years. “The client must begin taking required minimum distributions in 6 years,” Fourman told RIJ. “This would require holding some qualified assets in lower returning investments in the variable annuity to cover those obligations, potentially dragging down performance. The DIA, if started at age 70, can cover their income needs as well as RMD obligations.”
  • The couple will probably want to travel during the first few years of retirement, which are sometimes called the “go-go” years, so they should budget for travel expenses during that period.

Recommendations

  • Delay Social Security. Andrew and Laura should each delay Social Security benefits until they stop working in order to maximize their benefits. 
  • Buy a DIA with 35% of savings. They should convert $467,000 of tax-deferred savings to a joint deferred income annuity (DIA) with guaranteed installment refund, starting when Andrew and Laura retire at ages 70 and 69, respectively. The DIA doesn’t need to be inflation-adjusted because the couple’s expenses will be lower after their mortgages are paid off.  
  • Feel free to travel. The plan budgets $15,000 per year in the first four years of retirement for international travel.
  • Take more equity risk. Since the couple will depend on their investments for only 20% of their income, they can afford to take more risk with their portfolio. Fourman recommended that they raise their equity allocation to 80% from the current 65%.
  • Try to draw less than 4% from savings each year. Your average rate of withdrawal rate from investments will be under 4% annually, minimizing your exposure to market risk in down markets and allowing you to increase your risk exposure and periodically rebalance your portfolio to more equities.

Bottom line

Fourman tried to satisfy several key objectives: He wants his clients to pull most (80% in Andrew and Laura’s case) of their retirement income from guaranteed sources, he wants to free up as much savings as possible for long-term investment in equities, and he wants to cap their maximum draw-down rate from invested assets to 4%. Running the couple’s numbers through the Retirement NextGen software, he produced a recommendation that they annuitize $467,000 of their $1.24 million right away, with income starting in five or six years. 

With Social Security ($6,000 per month), pension ($585 per month), rental income ($2,500 per month for life) and an annuity paying $2,900 for life, Laura and Andrew will be able to limit withdrawals from their investment portfolio ($773,000 in 2017, after the annuity purchase) to between $3,100 and $4,700 per month. At that rate of withdrawal, the Retirement NextGen software showed, their portfolio should survive even a rough sequence of returns.

Andrew and Laura have a net worth today of about $2.68 million, including investments and real estate. According to Fourman’s projections, based on average net returns of about 4% from an 80% equity/20% fixed income portfolio, their children’s inheritance in 2048 will have an after-tax value of $3.19 million ($1 million in investments and the rest in real estate). 

© 2017 RIJ Publishing LLC. All rights reserved.

Is Trump Killing the Dollar?

Posted on August 17, 2017 by -

For nearly a century, the US dollar has been viewed as the financial world’s ultimate safe haven. No other currency has promised the same degree of security and liquidity for accumulated wealth. In past times of trouble, skittish investors and prudent central banks have all piled into dollar-denominated assets, not least US Treasury bonds. This may no longer be the case.

US President Donald Trump’s chaotic administration has severely undermined confidence in the greenback. Since being inaugurated before a phantom crowd of millions, Trump has picked fights with one government after another, including allies like Australia and Germany. More recently, he has taken the world to the brink of nuclear war by locking horns with North Korean dictator Kim Jong-un.

The dollar is about to face a serious test. Will global investors continue to put their money in a country whose leader loudly provokes the Hermit Kingdom with threats of “fire and fury,” or will they find financial refuge elsewhere?

Not since World War II has the safety of the dollar been in such doubt. In the post-war period, America’s extraordinarily large and well-developed financial markets promised unparalleled liquidity. And because the US was the dominant military power, it could ensure geopolitical security, too. No country was in a better position to supply safe and flexible investment-grade assets on the scale the global financial system required. As New York investment strategist Kathy A. Jones told the New York Times in May 2012, “When people are worried, all roads lead to Treasuries.”

The bursting of the US real-estate bubble in 2007 is a case in point. Everyone knew that the financial crisis and ensuing recession had started in the US, and that the country was to blame for a near-collapse of the global economy. And yet, even at the height of the crisis, a tidal wave of capital flowed into US markets, enabling the US Federal Reserve and Department of the Treasury to implement their response.

In the last three months of 2008 alone, net US-asset purchases topped $500 billion dollars—three times more than what was purchased in the preceding nine months. Far from depreciating, the dollar strengthened. The Treasury-bond market stood out as one of the few financial sectors that was still operating smoothly. Even after the credit-rating agency Standard & Poor’s downgraded Treasury securities in response to a brief US government shutdown in mid-2011, outside investors continued to acquire dollars.

Much of the spike in demand for dollars ten years ago could be attributed to sheer fear: no one knew how bad things might get. The same could be said of the US and North Korea’s escalating confrontatin today. But will history repeat itself, and send investors flocking toward the dollar?

The short answer is: don’t count on it. Markets have been signaling their distrust of Trump for months now. At this point, fear of a new crisis could precipitate capital flight away from the dollar, at which point the US would have to deal with a dollar crisis in addition to a potential military conflict.

Risk of a dollar crisis seemed minimal in the weeks immediately following Trump’s surprising electoral victory last November. In fact, by the end of last year, capital inflows had pushed the dollar up to levels not seen in more than a decade, owing to expectations of large-scale deregulation, tax cuts, and fiscal stimulus in the form of infrastructure spending and increased outlays for America’s supposedly “depleted” military. Economic growth, investors believed, was bound to improve.

But with the Trump administration now engulfed by scandals, the post-election “Trump bump” has faded, along with faith in the dollar. In the administration’s first 200 days, the dollar has lost almost 10% of its value. While Trump has been tweeting nonsense, investors have been looking for alternative safe havens in other markets, from Switzerland to Japan. This trend began before the US’s latest contretemps with North Korea, but it was only a trickle then. Now, that trickle is threatening to turn into a flood that will leave the dollar permanently damaged.

Of course, the Trump administration might actually want a weaker dollar, and to let others assume the role of global safe haven. But such an abdication would be historically—and dangerously—shortsighted.

The dollar’s popularity as a store of value confers an “exorbitant privilege” to the US. When investors and central banks place their wealth in Treasury bonds and other US assets, the US government can go on spending whatever it needs to sustain its many security commitments around the world, and to finance its trade and budget deficits.

With his transactional approach to politics, Trump seems to focus more on the costs of having a global reserve currency than on the advantages. But he cannot hope to “Make America Great Again” if he has to worry about capital flight, and he will not be able to enact his domestic agenda if he has to accommodate negative market sentiments abroad.

There will be nothing “great” about an America that has sacrificed its dominant position in the global financial system. If Trump tests the dollar too much, he will probably come to regret it.

Benjamin J. Cohen is Professor of International Political Economy at the University of California, Santa Barbara, and the author of Currency Power: Understanding Monetary Rivalry.

Roth 401(k)s Are the People’s Choice

Posted on August 17, 2017 by -

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%

Posted on August 17, 2017 by -

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

Posted on August 17, 2017 by -

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

Posted on August 17, 2017 by -

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.