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On the Case: An Income Plan from ReLIAS

Posted on July 20, 2017 by Mark Warshawsky -

A few weeks ago RIJ challenged its readers to suggest solutions to the real case of a near-retirement professional working couple (“Andrew” and “Laura”) whose qualified and non-qualified savings amount to about $1.2 million and whose two homes have a combined market value of about $1.8 million.

Mark J. Warshawsky, Ph.D., was among the first responders, and his solution is described below. A prolific author (e.g., “Retirement Income: Risks and Strategies,” MIT Press, 2012), he has worked in government (Assistant Treasury Secretary for Economic Policy, 2003-2006), consulting (Director of Retirement Research, Towers Watson) and academics (he’s a Senior Research Fellow with the Mercatus Center at George Mason University).

He has also been an entrepreneur. Four years ago, Warshawsky (right) founded ReLIAS LLC, a “design firm for personalized retirement income solutions.” He submitted Andrew and Laura’s case specifics (see tables at bottom of this story, or click here to see prior story) to the ReLIAS software (making some assumptions where needed) and produced the following preliminary solution.

Quick take-away

Warshawsky’s solution matches the school of thought that says: Use life annuities to fill any gaps (beyond Social Security and pensions) in required essential income and then exploit the increase in risk capacity by putting all other investable assets in equities. Since this couple can afford to keep paying down the mortgages on two homes (a primary residence worth $1.23 million and an income-producing property worth $435,000), he recommends that they hold onto their real estate equity for potential application to health care expenses, if necessary.

ReLIAS’ assumptions

The Social Security income at age 70 will be $36,000 annually for each member of the couple.
No new contributions were being made to IRAs.
Both members of the couple are in good health, are moderately risk averse and are conservative in their future spending profile.
Each strategy starts at age 70.
Annual investment expenses on the portfolio will be 75 bps.
The taxable assets are tax-favored (unrealized capital gains) or tax-exempt.
The couple’s non-health spending needs will decline after age 80.

Advice point: Create an analysis for each spouse

Because both members of the couple have their own IRAs, and seem to have complete work histories, he ran the software separately for each, giving each an independent strategy, with no joint-and-survivor annuities purchased, or spousal benefits in Social Security and the pension.

Advice point: Continue to build real estate equity for future use

Reserve the real estate assets for the provision of housing services and as a contingent reserve for future uninsured health and long-term care needs.

Advice point: Use the couple’s SEP-IRAs for their retirement income

Set aside the taxable assets for the desired bequests and any emergency family or personal needs.
The retirement assets will be used mainly for producing retirement income. Minimum distribution requirements would force some of that anyway.

Recommendation for ‘Andrew’: Single-premium immediate annuities

Andrew should purchase a fixed $288,000 SPIA at age 70 from the IRAs.
To maintain inflation-protected income, he should make smaller annual purchases of SPIAs for 15 years ($2,200 at age 71 increasing slightly every year to $3,100 at age 85 and none thereafter).
Why not buy inflation-indexed SPIA instead of buying more income each year? “They have larger loads and therefore I avoid them. Annual purchases of SPIAs allow us to do some inflation adjustment, interest rate hedging (pricing of SPIAs) as well as control the slope of income,” Warshawsky said. That is, some retirees may want to change their real income.
The remaining retirement portfolio should be allocated 100% to equities.
Andrew should distribute 7.5% of the portfolio balance (whatever dollar amount that is) annually to be consumed.
Why is the payout rate so high? “The plan is determined by the goals, preferences and resources available,” Warshawsky said. Why not annuitize more wealth to meet the income goal? “Income is the combination of payouts from immediate annuities and withdrawals,” he said. “SPIAs are great for steady income but lack liquidity and growth potential, so a combination approach is best.”

Recommendation for ‘Laura’: Similar to Andrew’s

Laura should purchase a $330,000 SPIA at age 70 and make smaller annual purchases of SPIAs ($3,300 to $4,300 from age 71 to 82).
She should allocate 100% to equities and distribute 7.5% of her portfolio balance each year.

Bottom line

Andrew’s annual income starting at age 70, with Social Security, will average about $90,000 in pre-tax income (at historical rates of interest, inflation, and investment returns), or about $67,000 post-tax, declining, in real terms, to $60,000 at age 75, and $54,000 at age 80, as the couple’s non-health spending needs likely decline.
Laura’s annual income starting at age 70, with Social Security and her DB pension of $7,000 per year, will be $110,000 pre-tax ($80,000 post-tax) at age 70, declining gradually, in real terms, to $71,000 at age 75 and $63,000 at age 80, on average.
The amounts could be higher or lower, depending on economic and financial realizations, with Social Security, the annuities, and pension providing (real or nominal) floors.

Why We Need Randomized Modeling for Retiree Income Strategies

Posted on July 20, 2017 by Mark Shemtob -

In an effort to enhance their income in retirement, retirees are required to make some important decisions when creating their personal financial plans. Some retirees may have many decisions, yet others just a few. Here are some decisions that retirees may need to consider:

When should I start collecting Social Security?
Should I purchase an insured lifetime income product; if so, which type(s) and with how much of my retirement savings?
If I am entitled to an employer pension should I elect an annuity payment (and if so, in what form), or should I select the lump sum option if permitted?
If I have retirement funds in different sources (pretax, Roth, and after-tax), in what order should I withdraw them to minimize taxes?
How should I invest my retirement savings among different investment classes such as stocks and bonds?
If I have home equity value, should I use it to create income through a reverse mortgage?
If I have debt, should I pay it off with some savings?
Should I purchase long-term care insurance or plan to finance from retirement savings, should the need arise?
Should I relocate to another state for tax purposes?
Should I maintain or buy life insurance for estate tax or legacy goals?

An illustration

Even a few decisions can lead to thousands of unique strategies. To see how stochastic modeling can help a retiree decide on a strategy by comparing alternatives, let us look at a simple example.

A hypothetical 62-year-old would-be retiree’s primary goal is to secure an inflation-adjusted pretax income for life starting at $X per month. The income will come from Social Security, a fixed-income life annuity, and periodic withdrawals from an investment portfolio. She wishes to consider:

When to start collecting Social Security (ages 62 to 70);
Whether to purchase a fixed-income life annuity with 0%, 25%, 50% or 75% of her retirement funds
The investment allocation to be used with the remaining retirement savings modeling a passive equity fund and a passive fixed-income fund with 11 potential allocations (0% to 100% of each investment class in 10% intervals)

This basic example has 396 alternative strategies (9 × 4 × 11). Stochastic modeling can test these strategies to determine which provides the greatest probability of success in securing sufficient income to last an uncertain lifetime. The success probabilities are determined based on thousands of scenarios for each strategy using alternative rates of return (based on mean and variance for each investment class), inflation expectations, as well as life expectancies (based on a life expectancy table considering current age, health, gender and income level.)

If not satisfied with the strategy recommended by this analysis, she should consider the following:

Test for a different income level, especially if the success probability is very high or very low
Test the impact on the success probability if one or more of the optimum strategy components are modified
Once an income amount and strategy are finalized, she can investigate the amounts that would likely be available as liquid investments or an inheritance each year in the future.

Alternatively, our retiree might wish to have modeling performed based on a success percentage (e.g., 90%). The result would indicate the maximum inflation-adjusted income that can be generated with the desired success level. If not satisfied with the strategy produced, she should consider the following:

Test for a different success percentage, especially if the income level is very high or low
Test the impact on the monthly income if one or more of the optimum strategy components are modified
Once an income amount and strategy are finalized, she can investigate the amounts that would likely be available as liquid investment or an inheritance each year in the future.

One might think that our hypothetical retiree would need to provide an overwhelming amount of information for this analysis. But, addition to either a monthly income or success percentage, all she would need to supply is:

Date of birth
Gender
Smoking history and general health information
Social Security information
Retirement savings

In the case of more complicated applications where more decisions need to be considered, more input information will be required.

Technical considerations

Modeling will depend on a variety of parameters built into the program that will require periodic updating, such as:

Standard mortality tables by gender
Mortality table adjustments to account for personal health and income levels
Capital market expectations for expected returns and variances of alternative investment classes
Expected inflation rates
Others (annuity purchase rates, tax rates, LTC premium rates, etc.).

The use of unreasonable rates of returns for investment classes would favor certain strategies over others. For example, the value of delaying Social Security would be understated if unreasonably high rates of return were assumed. Higher-than-reasonable rates of return would also discourage consideration of insured lifetime income products. Alternatively, longer-than-reasonable expected lifetimes would tend to emphasize the value of annuities and delaying Social Security. Shorter-than-reasonable expected lifetimes would do the opposite. Impact of the overall household income should be considered, including that of a spouse or partner.

Conclusion

Stochastic modeling tools have been used for over a decade to test retirement financing scenarios. Many of these tools are proprietary and available for use by advisers when recommending the products or investments offered by the various financial institutions. These can be biased and may not consider strategy components that the financial institution would not offer or benefit from.

Other modeling tools have been created for independent financial advisers and generally provide for more flexibility in strategy options. However, biases of the adviser may impact the strategies tested. For example, some fee-based advisers may not consider the use of fixed-income annuity or deferred-income fixed annuity products for their clients.

Consumer-created web applications may be especially valuable for individuals with modest retirement account balances who cannot attract the expertise of an unbiased adviser with decumulation expertise. However, as an individual’s personal situation becomes more complex, the value of retaining a qualified advisor increases.

Mark Shemtob, MAAA, FSA, is an actuary and the owner of Abar Retirement Plan Services LLC.

Vanguard’s New CEO: No Surprises

Posted on July 20, 2017 by Kerry Pechter -

Vanguard has a new CEO, Mortimer (Tim) Buckley, 48. Don’t expect a break in continuity at Vanguard as he succeeds Bill McNabb. Buckley’s ascension has been foreordained since he arrived from Harvard College and Harvard B-school as an assistant to Vanguard founder Jack Bogle in 1991.

Long ago, as a new hire at the firm, I saw Buckley (right) give a presentation to Vanguard “crewmembers.” Afterwards, I had to ask who this preternaturally polished, square-jawed young man could be. Buckley often ran five miles at lunchtime with then-CEO Jack Brennan. It was rumored that the two had known each other in Boston since Buckley was a child. Over the years he has served as Vanguard’s Chief Information Officer, head of its Retail Investor Group, managing director and Chief Investment Officer.

Buckley can be expected to maintain Vanguard’s focus on austere pricing and perfect execution. He inherits a firm whose $4 trillion+ AUM has grown 16-fold in 20 years; time has vindicated not only its passive investing style but also its ownerless, co-op business model that pays off richly for its leaders, outside fund managers, clients and employees (although the pressure for perfection can make it stressful to work there and a lack of room for internal creativity can leave ambitious young talent frustrated and impatient).

What intense Ivy League distance-runner is Buckley grooming as his own successor? Given the new CEO’s youth, that question may be moot until about 2030.

LPL will flatten advisor compensation on mutual fund sales

Posted on July 20, 2017 by Editorial Staff -

In a nod toward compliance with the Department of Labor’s still-uncertain fiduciary rule, LPL Financial’s 2018 mutual fund platform will feature load-waived shares in more than 1,500 funds from 20 asset managers, Bank Investment Consultant magazine reported this week.

LPL, the largest independent broker-dealer in the U.S., also plans to cap upfront commissions to 3.5% and limit trail commissions to 0.25% on the platform, which is scheduled to launch in early 2018, according to press reports.

The fiduciary rule’s best interest contract exemption (BICE) requires advisors who accept manufacturer-paid commissions on product sales to IRA clients to pledge to act in their clients’ best interests instead of recommending products that pay the advisor more. To comply with the BICE, brokerages are leveling or reducing advisor compensation on mutual fund sales to IRA clients.

The mutual fund industry resents the rule, whose express purpose is to help IRA investors spend less on fees and keep more money in their accounts so that fewer of them run out of money in old age and need help from Medicaid. Its representatives are lobbying the Trump administration may try to rescind or revise the rule before its full implementation Jan. 1.

While some brokerages may choose not to offer brokerage services to IRA owners at all (thereby avoiding exposure to the legal liabilities of using the BICE) LPL and other firms think that complying with the BICE and modifying their brokerage services for IRA clients, rather than shutting them down, will be better for everybody.

“At launch, [the new platform] will be a price-competitive solution that not only preserves investor choice — but amplifies it,” according to a company memo to advisers. “Other financial firms have limited or even fully removed brokerage options for retirement investors. But when brokerage is in the best interest of your client, we’re providing a solution.”

More than 80% of LPL’s current mutual fund products for brokerage clients are expected to be on the new platform. Offerings from Fidelity Investments are still awaiting final approval for possible inclusion on the platform, LPL said in a memo obtained by Financial Planning magazine.

LPL executives have yet to decide if they’ll require IRA owners to use the new platform, an LPL spokesperson told Financial Planning in an email. The choice depends on the “regulatory environment and industry developments,” he said.

Shift to passive funds slows down in June: Morningstar

Posted on July 20, 2017 by Editorial Staff -

Investors put $9.3 billion into U.S. equity passive funds last month, down from $13.1 billion in May 2017. Meanwhile, investors pulled $14.6 billion out of U.S. equity funds, compared with $16.2 billion in the previous month, according to Morningstar’s U.S. mutual fund and exchange-traded fund (ETF) asset flow report for June 2017.

Highlights from Morningstar’s report about U.S. asset flows in June include:

Investors continued to pour money into taxable-bond and international-equity funds. Unlike previous months, the taxable-bond category group saw higher inflows on the passive front than on the active one with inflows of $18.5 billion and $14.4 billion, respectively. Taxable-bond funds continued as the overall leader among category groups, with inflows of $32.9 billion; international equity followed with inflows of $28.9 billion.
The three Morningstar Categories with the highest inflows in June remained the same as the previous month: foreign large blend, intermediate-term bond, and large blend. A fourth category attracting strong flows in June was diversified emerging markets, anticipating stronger growth potential after the MSCI Emerging Markets Index returned 18.4 percent year to date.
Among top U.S. fund families, American Funds was the leader in active flows with $3.9 billion, followed by Vanguard with $2.9 billion. On the passive front, Vanguard was the top fund family, with inflows of $22.7 billion, closely followed by BlackRock/iShares with $22.4 billion in inflows.
Fidelity Series Intrinsic Opportunities Fund and Fidelity Series Growth & Income Fund attracted the largest active flows in June, both approximately $3.1 billion. PIMCO Income, which has a Morningstar Analyst Rating™ of Silver, was pushed to third place with flows of $2.6 billion. The passive fund with the highest inflows was Vanguard S&P 500 ETF Index Fund, which saw $3.1 billion in inflows.
Fidelity Series Equity-Income Fund had the highest outflows for active funds at $6.5 billion and Gold-rated Harbor International saw outflows of $1.0 billion, its third consecutive month on the bottom-flowing list. On the passive front, Power Shares NASDAQ-100 Index Tracking Stock ETF saw the highest outflows of $2.8 billion.
Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

Low unemployment is the bright spot in the economy: Chao

Posted on July 20, 2017 by Editorial Staff -

Even though the U.S. economy, inflation and sentiment all softened in the second quarter of 2017, the Federal Reserve remains committed to “normalizing” interest rates, marveled Philip Chao, principal and Chief Investment Officer of Chao & Co., a retirement plan and fiduciary consulting firm in Vienna, VA, in his 2Q2017 market commentary. “Consensus suggests that the Fed will likely raise rate once more this year (possibly in December) and soon (possibly in September) will normalize its balance sheet,” he wrote.

“After four 25bps rate hikes [by the Federal Reserve] since 2015, we have witnessed a gradually more accommodative financial condition which is opposite to what was expected. Is the market saying we don’t believe the Fed will keep raising rates and in fact it would lower rates if the economy continue to slow? Or is the market saying that with a lower neutral or terminal rate, the rate normalization is almost over and we are not worried?” Chao added.

“Since the Trump win last year, the market has reacted very positively in anticipation of constructive fiscal policies, tax reform and deregulation,” he concluded. “After the failure to repeal and replace Obamacare, it is increasingly unlikely that any major legislation will pass during this fiscal or calendar year. We expect a difficult September as lawmakers debate the debt ceiling and the 2018 budget.”

Highlights from Chao’s commentary included:

U.S. first quarter real GDP was revised upward to 1.1%. The second quarter is projected to be at or around 2.5%. This means the economy was growing at an annualized rate of 1.8% for the first half-year. Depending on how the second half performs, the economy is on track for around 2% growth this year. This assumes no significant policy changes in Washington, such as infrastructure spending and tax reform.
Good news remains with the labor economy, with U3 unemployment down to 4.4% and U6 down to 8.6%. Even at the 62.8% participation rate, it is hard to argue that much labor slack remains. Although wage growth has not been obvious, the Employment Cost Index (wage and benefit cost) is now growing at 2.9% while the average weekly earnings is at 2.5%. Both are now above the inflation rate.
The Federal Reserve has moved from a dovish bias to a normalization bias. The Federal Open Market Committee (FOMC) is expected to raise rates three times this year. The market expects the next hike to be in December. The FOMC is positive about the U.S. and global economy, positive about the labor economy, confident that the core inflation will return to 2%, confident in a strong banking system, and more able to act under a supportive financial condition environment in the market. But the pace is expected to remain accommodative in supporting its dual mandates.
The FOMC is expected to embark soon on its efforts to normalize the Fed’s balance sheet by not reinvesting all the principal payments from agency debt and MBS and not rolling over maturing Treasury securities at auction. The June FOMC meeting provided an updated guidance and framework of how the FOMC will use an escalating cap system to shrink its balance sheet over time. This process will be gradual. Markets expect the normalization to begin this September.
Although CPI and Core CPI have taken a surprising turn downward and away from the 2% inflation target, the FOMC expects the effect to be temporary. The FOMC’s long-term outlook for inflation remains higher than the market expectation, as evidenced by the 5-year forward inflation expectation value, as well as by the 10-year forward inflation estimate (comparing the 10-year Treasury yield with 10-year TIPS). Historically, the market has proven correct about a lower interest rate with a lower inflation rate; the FOMC had to repeatedly align its projection with the market expectation.
After almost a decade of unconventional and extraordinary monetary accommodation globally, investors and markets have grown complacent with and reliant on the central bank’s safety net. The normalization phase is likely to be tricky, and sooner or later financial conditions will tighten and add stress to the system. This effect will be exaggerated if the European Central Bank and other central banks also begin to normalize. Regardless of the gradual pace of balance sheet and rate normalization, the markets are focused more on the destination than on the path.
The world dodged a bullet in Europe after the Brexit Referendum. The outcomes of a string of Europe elections did not favor the breakup of the eurozone and the euro under a wave of populism. This has helped to reduce political risk and uncertainty in the eurozone and added support to a cyclical economic rebound.

Prudential reorganizes five businesses into three main groups

Posted on July 20, 2017 by Editorial Staff -

Prudential Financial, Inc., today announced a new organizational structure for its U.S. businesses that “better reflects the company’s strategic focus on leveraging its mix of businesses and its digital and customer engagement capabilities to expand its value proposition for the benefit of customers and stakeholders.”

Under the new structure, which will become effective in the fourth quarter of 2017, the company’s five U.S. businesses will be aligned under three groups oriented to the needs of specific customers.

Each group will have a leader focused on understanding customer needs, experiences and expectations, and applying that understanding to capture growth opportunities within and across businesses.

Individual Solutions will comprise Annuities and Individual Life Insurance, and be led by Lori Fouché, who currently leads Annuities. Kent Sluyter, who currently oversees Individual Life Insurance, will become president of Annuities. Caroline Feeney, who currently leads Prudential Advisors, will become president of Individual Life Insurance, which includes Prudential Advisors. Salene Hitchcock-Gear, currently chief operating officer of Prudential Advisors, will become president of Prudential Advisors and report to Feeney.
Workplace Solutions will comprise Retirement and Group Insurance, and be led by Andy Sullivan, who currently leads Group Insurance. Phil Waldeck will continue to lead Retirement, and Jamie Kalamarides, currently head of Full Service Solutions within Retirement, will become president of Group Insurance.
Investment Management will continue to comprise all PGIM businesses, including PGIM Investments, and will continue to be led by David Hunt, president and CEO of PGIM.

Betterment adds socially-responsible portfolio option

Posted on July 20, 2017 by Editorial Staff -

Betterment, the $9.6 billion digital advisory platform, now offers its 270,000 online clients a socially responsible investing (SRI) portfolio strategy that invests in companies that foster “inclusive workplaces or work toward environmental sustainability” while avoiding those with poor labor practices or that damage the environment.

The SRI portfolio reflects a 42% improvement in social responsibility scores (relative to the Betterment portfolio) on US large cap assets. The improvement came from substituting iShares DSI—a broad US ESG stock market ETF—for the portfolio’s U.S. large cap exposures. An additional ETF, iShares KLD, will serve as the secondary ticker for DSI.

All other SRI portfolio asset classes match Betterment’s existing portfolio because an acceptable alternative doesn’t yet exist or because the existing alternatives have high fees or liquidity limitations. Betterment plans to add new SRI funds as they become available. The SRI portfolios are also eligible for Betterment’s tax-loss harvesting and tax-coordinated portfolios services.

Total Assets Indexed or Benchmarked to S&P Dow Jones Indices

Posted on July 13, 2017 by Editorial Staff -

1Q2017 bank annuity fee income up 4.2% from 1Q2016

Posted on July 7, 2017 by Editorial Staff -

Income earned from the sale of annuities by large bank holding companies in first quarter 2017 rose 4.2%, to $788.5 million, from $756.6 million in first quarter 2016, according to Michael White Associates (MWA), which compiled the findings.

The findings are based on data from all 5,856 commercial banks, savings banks and savings associations (thrifts), and 624 large top-tier bank holding and thrift holding companies (collectively, BHCs) with consolidated assets greater than $1 billion operating on March 31, 2017. Several BHCs that are historically insurance companies are excluded from the report.

Of 624 BHCs, 280 or 44.9% participated in annuity sales activities during first quarter 2017. Their $788.5 million in annuity commissions and fees constituted 35.1% of total BHC insurance sales volume (i.e., the sum of annuity and insurance brokerage fee income) of $2.24 billion.

1Q2107 bank annuity fee income

Of 5,856 banks and thrifts, 762 or 13.0% participated in first-quarter annuity sales activities. Those participating banks and thrifts earned $189.8 million in annuity commissions, or 24.1% of the banking industry’s total annuity fee income. The annuity production of banks and thrifts fell 9.2% from $209.1 million in first quarter 2016.

Over two-thirds (67.6%) of BHCs with over $10 billion in assets earned $762.1 million in first-quarter 2017 annuity commissions, an amount equal to 96.6% of total annuity commissions reported by the banking industry, up 6.2% from the $717.9 million in annuity fee income earned in first quarter 2016.

Among this over $10 billion asset class, annuity commissions made up 37.6% of their total insurance-product sales revenue of $2.03 billion in first quarter 2017. Wells Fargo & Company (CA), Morgan Stanley (NY), UBS Americas Holding (NY), JPMorgan Chase & Co. (NY), and Citigroup Inc. (NY) led all bank holding companies in annuity commission income.

BHCs with assets between $1 billion and $10 billion recorded a 32.0% fall in first quarter to $26.4 million in annuity fee income, down from $38.8 million in first quarter 2016. These annuity earnings accounted for 12.2% of their total insurance sales income of $216.6 million. Among BHCs with between $1 billion and $10 billion in assets, leaders included First Command Financial Services, Inc. (TX), Wesbanco, Inc. (WV), United Financial Bancorp, Inc. (CT), First Commonwealth Financial Corporation (PA), and NBT Bancorp Inc. (NY).

The smallest banks and thrifts, those with assets under $1 billion, act as “proxies” for the smallest BHCs, which are not required to report annuity fee income. These banks generated $12.2 million in first quarter annuity commissions, a 20.4% drop from $15.4 million in first quarter 2016.

Less than 10% (9.4%) of banks this size engaged in annuity sales activities, the lowest participation rate among all asset classes. Among these banks, annuity commissions constituted the smallest proportion (16.1%) of total insurance sales volume of $75.9 million.

Leaders among these bank proxies for small BHCs were The Citizens National Bank of Bluffton (OH), First Federal Bank of Louisiana (LA), Bank Midwest (IA), Thumb National Bank and Trust Company (MI), First State Bank (NE), FNB Bank, N.A. (PA), Bank of Clarke County (VA), Heritage Bank USA, Inc. (KY), First Columbia Bank & Trust (PA), and First Neighbor Bank, N.A. (IL).

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 4.9% in first quarter 2017. Among the top 50 small banks and thrifts in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 12.8% of noninterest income.

Honorable Mention

Posted on July 7, 2017 by Editorial Staff -

Former pro footballers receive advice from Northwestern Mutual

Two Northwestern Mutual advisors will be the exclusive Wealth Management Advisors of the National Football League (NFL) Alumni Association, according to an announcement last week by Pro Football Legends, the commercial marketing arm of the association.

The advisors, Stephen Schwartz, CFP, AEP, and Michael Schwartz, CFP, AEP, are brothers. Michael advised current and former players, coaches and employees and their families since March 2016. He is now joined by Stephen.

Members of the NFL Alumni Association can receive a free comprehensive consultation from one of the Northwestern Mutual advisors. Services life insurance, long term care planning, retirement planning, investment strategies and estate planning.

“As players transition to new careers and plan for their futures after their playing days have concluded, maintaining financial stability can be difficult,” said Elvis Gooden, President and CEO of NFL Alumni, in a release.

“Enhancing financial security for NFL Alumni members and their families is an important goal which can be accomplished through developing and tailoring both offensive and defensive individualized financial game plans.”

Robo plus human beats either alone: Milliman

An “iterative process of advanced computing and human input” can be better at risk management than either machine algorithms or humans alone, according to a new study examining multi-criteria decision-making by Milliman Inc.

“While not obvious at the outset, combining human input with advanced computer modeling allows domain experts to analyze results and elicit insights into features that subsequent iterations of a model should contain, thereby refining the process,” said Neil Cantle, principal in Milliman’s London office.

The results of the Milliman study suggested a number of practical applications for insurance enterprise risk management (ERM), including finding patterns in the key risks that drive capital losses and understanding diversification in order to enable “quick judgments about the similarities and differences in the risk profiles of different portfolio elements,” according to Milliman.

When faced with “multiple objectives and multiple constraints,” “visualization and complex systems-mining techniques” plus “expert input” can solve problems that “machine algorithms” have difficulty solving, Milliman’s release said.

Milliman’s Corey Grigg said, “Looking toward the future, this sort of optimization technique can extend to big data, simulations, and enhanced visualization, ensuring that even as the complexity of our data and problems increases, experts can continue to add value.”

Milliman’s study employed the DACORD platform from DRTS, Ltd. to support its system-mining efforts. It was conducted in conjunction with Dr. Lucy Allan of University of Sheffield.

“Future states are unknown, involve human affairs and are therefore complex,” said Jeff Allan, CEO of DRTS, Ltd. “Augmenting experts with the appropriate tools and processes can aid the reasoning and evaluation of a range of solutions.”

Bill Harmon to lead Voya’s 401k business

Bill Harmon has joined Voya Financial as its new president of Retirement Corporate 401(k), effective June 30. He will join CEO of Retirement Charlie Nelson’s leadership team, as well as Voya’s Operating Committee, a Voya release said.

Harmon will oversee all aspects of the Corporate 401(k) business, including sales, relationship management and strategy for all segments of the market, from small- and mid-sized companies to jumbo plans.

Harmon spent 29 years in the U.S. retirement business of Great-West Lifeco, which is now called Empower. Before joining Voya, he was senior vice president, Core Markets for Empower Retirement.

Harmon holds a bachelor’s degree in Marketing from Loyola Marymount University in Los Angeles. Voya serves approximately 47,000 plan sponsor clients and more than 4.5 million individual retirement plan investors. Voya also operates a leading broker-dealer.

A High-Tech Challenge for High-Touch Advisors

Posted on July 6, 2017 by Kerry Pechter -

Technology vendors with new digital tools—“inorganic intelligence,” as one consultant calls them—are pitching their wares to wealth management firms these days with unprecedented zeal. Almost daily, a firm like Envestnet, Broadridge, FIS or Wealth2k unveils a digital or web-based solution for wirehouses, brokerages or boutique advisory firms.

Wealth managers are listening more closely (and more humbly) than they used to—and for good reason. Their cushy empire is under siege. The 401(k) revolution has gradually produced an unprecedented army of mid-sized investors, many now retiring. This army is now overwhelming a shrinking pool of advisors, and bringing the compliance standards, low costs and automated investment practices of the 401(k) world with them.

But many wealth managers, by all accounts, aren’t sure which technologies to acquire in response. For the moment, they’re shopping for solutions that will help them document their processes for complying with the fiduciary rule. Beyond that, they are said to be more or less unsure about which aspects of their businesses to automate or which slices of the wealth market they should pursue, defend, or relinquish.

“We’re talking about wealth managers changing the way they do business, not just which technology products they buy,” Alois Pirker, Research Director of Aite Group’s Wealth Management practice, told RIJ this week. “The era when the business guys and the tech guys had separate problems is over. Most business model decisions today have technology implications and vice-versa.”

“There’s a gun pointed at the head of the advisory business, held there by government-mandated compliance directives and rapidly advancing fintech,” said David Macchia, founder and CEO of Wealth2k, which began marketing web-based solutions to advisors more than a decade ago.

“This combination creates commoditization of advice, products and advisors themselves,” he added. “This is the supreme challenge to the entire wealth management industry. My sense is that wealth management firms have been hyper-focused on compliance-driven technology spending that’s directly related to their perceived obligations under the Department of Labor fiduciary rule. But they don’t know, in general, what the next best move is.”

The Broadridge view

These are busy times for technology vendors. A few weeks ago, Broadridge, the 10-year-old spinoff from Automated Data Processing (ADP), issued a white paper urging wealth managers to automate. Broadridge has jumped on the digital opportunity. The once-quiet white-label communications firm now offers client-engagement, compliance and trading automation tools.

Broadridge uses a novel term—“inorganic intelligence”—to describe what wealth managers need to leverage. The term encompasses “artificial intelligence, natural language processing, machine learning, complex event processing, cognitive computing” as well as behavior analysis tools, virtual assistants, chat-bots and predictive analytics.

These tools, Broadridge and other technology firms believe, will help wealth managers deal with the DOL fiduciary rule, financial advisor retention, competition from robos, the need to pivot toward Millennials, the tyranny of the smartphone and cyber-security.

“At Broadridge, we’re asking, ‘How can we help advisors use technology for relationship initiation and acceleration? How can we turn a two-dimensional investor into a real person?’” said Traci Mabrey, head of Wealth Solutions at Broadridge.

“This is about personalization of the investor base, about maintaining ‘high-touch’ world. With tech at their fingertips, advisors can focus on the business of financial advice and the intangible element of trust. We’re hearing that the primary goal-set is around the ‘digital engagement strategies,’ a hybrid between the personal and the digital. As a fintech provider, that’s where we think the excitement is.”

The FIS view

FIS, the Fortune 500 financial software firm, recently announced a partnership with Trizic to deliver a pre-fab robo solution to banks and credit unions. The partnership is intended “to increase advisors’ ability to provide investment advice to Millennials and tech-savvy high net worth clients more profitably,” according to an FIS release.

The Trizic technology, which is part of the existing FIS wealth management platform for financial institutions, “automates the full advisor workflow from onboarding and risk tolerance to portfolio construction, reporting and billing. It also gives a complete digital advice solution to banks and other financial institutions without a wealth division.”

“Wealth managers at every type of institution are struggling to attract the lower balance, emerging wealth from Millennials,” said Will Trout, a senior analyst at Celent. “Some form of automation is required to cost-effectively service smaller-balance accounts.

“Bank wealth managers are using robo as part of the broader refinement of their segmentation/client optimization strategies. They want to hook younger people onto their investment platforms and activate dormant customers from within their wealth management units and other parts of the bank.

“The gains in fee income are expected to offset any cannibalization from their high-touch wealth advisory services. It’s an efficiency play aimed at reducing costs. But it has the parallel objective of growing the business over time,” Trout added.

“Within the institutions, robo will be a bottom-up phenomenon,” he added, meaning that advisors want internal digital support, especially to serve lower-value clients, as much as retail investors want digital interfaces with the banks.”

The 80/20 rule

All wealth managers face the Pareto principle, which states that 80% of a company’s revenue from 20% of its customers. In that sense, all of them face the problem of serving the smaller clients efficiently.

“A private banker at one of the most profitable banks told me that 40% of his investment portfolios aren’t profitable. That is, 40% of accounts are too small to pay for themselves,” Aite’s Pirker said, adding that the bank still isn’t sure what to do about it.

At the same time, each wealth management firm has unique traditions and perceived obligations. “Take Merrill Lynch and Morgan Stanley, for instance. Merrill Lynch is part of the bigger Bank of America empire, and it has to come up with something for the middle market. It can’t say, ‘We don’t care about people with less than $1 million,’” Pirker said.

“Morgan Stanley, however, might be able to say—though I haven’t heard them say this—we’re just going to serve the high net worth.” Some companies have already decided what they will do. “Look at Goldman Sachs, which has made moves toward the wider market,” he added.

It can be risky, but there’s potentially a lot of money to be made by extending a luxury brand into the middle-market, Pirker noted. “Those firms that bring a high-end wealth management brand to the mass-affluent marketplace are the ones that will ultimately harness the competitive advantages of these innovative platforms,” he said.

Whither or wither

Lots of questions remain. Before they can shop for digital tools, wealth managers have to decide what they want. To upgrade their front, middle or back offices? To make more sophisticated strategic decisions? To give clients a faster, cheaper, and simpler experience? To pursue or abandon the mass-affluent market? To analyze big data and refine their marketing? To control advisor conduct? To master the world of mobile?

It’s an awesome challenge. “Big firms have deep pockets and can sort themselves out eventually. But you also need a willingness to change,” Pirker said. “Some are better at that than others. It’s a Netflix-versus-Blockbuster moment. And while financial assets are stickier than video rentals, technology is going to take its course.”

The Pleasant Inflation Surprise — Will It Last?

Posted on July 6, 2017 by Stephen Slifer -

At midyear it is useful to reflect on how the economy and inflation are tracking relative to what had been expected at the end of last year. The biggest surprise, for us, is that the inflation rate did not accelerate in the first half of this year.

What’s going on? Should the Fed postpone further rate hikes until the inflation rate begins to climb?

We believe that the failure of the inflation to climb is attributable to two separate one-off events the positive impact of which will prove to be transitory. As a result, the Fed is justified in continuing on its path of gradual increases in the funds rate.

In our year-ahead forecast in December we projected that the “core” inflation rate (i.e., excluding volatile food and energy prices), would rise to 2.7% in 2017 from 2.3% in 2016. The labor market was tight which seemed likely to push wages higher and lift inflation in the process. The shortage of available homes and apartments was steadily lifting rents at a 3.5% pace. And the cost of medical care was surging.

Instead, the core rate has backtracked and actually slowed to 1.7% in the first five months of this year. Two factors are largely responsible for this surprising behavior.

First, a price war has broken out amongst the nation’s wireless providers and in the past year cell phone prices have plunged 12.5%. A drop of that magnitude has shaved 0.2% off the core inflation rate during that period of time. Mobile phone prices have fallen for eleven months in a row, capped by a whopping 7.0% decline in March alone. The core rate today would be 1.9% rather than 1.7% in the absence of the cell phone price war.

Competition in this industry will get even more intense now that the federal government has auctioned off rights to more wireless spectrum to new entrants such as television providers Comcast and the Dish Network. Spectrum, or airwaves, is what these companies use to deliver wireless calls.

The price wars began in April of last year when major carriers such as AT&T, Sprint and T-Mobile slashed rates on their unlimited calling plans. The nation’s largest provider, Verizon, joined the fray earlier this year. The last time this happened was in 1999-2000. Eventually the price wars ended and prices stabilized for more than a decade. Thus, the current drop in cell phone prices will be transitory.

At the same time, prescription drug prices have declined since the election. In October of last year, prior to the election, prices were rising at a 7.0% pace. Since the election prescription drug prices have fallen at a 1.0% rate. The chart below tracks the year-over-year change in this series so the most recent price declines are not fully reflected.

During the election campaign Trump promised to drive down drug prices. He talked about allowing consumers to import prescription drug medicines from abroad, and having Medicare negotiate prices directly with pharmaceutical companies. His success thus far seems to stem less from legislation than fear of being called out by the president for price gouging.

Last year EpiPen maker Mylan and Valeant Pharmaceuticals experienced public outrage over dramatic price increases. A Trump tweet could in a nanosecond put a company in his crosshairs with potentially damaging consequences to both its reputation and stock price. One may not approve of the method, but intimidation seems to be accomplishing his objective.

So what does the Fed do now? We believe it will view these recent price declines as temporary and continue on its slow but steady trajectory toward higher interest rates. Remember, Fed policy is determined not only by inflation but also by the pace of economic activity as well.

The economy seems to be gathering momentum. After stumbling to a 1.4% pace in the first quarter, GDP growth seems poised to rebound to a 2.5% pace in the second quarter with a similar rate likely in the second half of the year. GDP growth in Europe and Asia seems to be quickening as well. The unemployment rate has dipped from 4.7% at the end of last year to 4.3%, which is below almost anybody’s estimate of the full employment threshold.

Wage pressures are sure to intensify and put upward pressure on the inflation rate. There continues to be a shortage of available housing, which is boosting rents. That is not going away any time soon. On balance, the economy seems likely to generate upward pressure on the inflation rate later this year and in 2018.

The recent price declines in wireless services and drug prices will not continue, but they are not going to rebound either. In the case of wireless, prices leveled off for more than a decade after the extreme price drop in 1999-2000. Competitive pressure in the industry prevented prices from rebounding.

With respect to drug prices, Trump has intimidated the pharmaceutical industry. Going forward, prices will climb slowly from a lower base. In December we expected the core CPI to rise 2.7% in both 2017 and 2018. Today we expect the core rate to increase 2.0% this year and 2.5% in 2018. The direction is the same, but prices will not rise as quickly as had been anticipated earlier.

Either way, the core rate is likely to exceed the Fed’s 2.0% inflation target by the end of next year, which should keep the Fed on its path of gradual increases in the funds rate. It still has a long way to go before it reaches a “neutral” rate of about 3.0%, a level not expected until 2020. Inflation may be better behaved than the Fed thought, but there is no reason to alter its current path to neutrality. Higher rates will not begin to bite for several more years.

KeyCorp buys HelloWallet from Morningstar

Posted on July 6, 2017 by Editorial Staff -

KeyCorp has completed its purchase of HelloWallet, the personal finance software platform, from Morningstar, Inc. The service will be offered to businesses that offer their employees Key@Work, the bank’s workplace “financial wellness” program.

The deal made sense: KeyCorp had been HelloWallet’s largest single biggest customer and the robo-advice platform’s largest source of new customers, according to a release issued when the sale was announced on May 31.

The $134.5 billion bank holding company may be the first bank to move into the financial wellness space, which has been dominated by retirement companies. Financial terms of the transaction were not disclosed. Three dozen HelloWallet employees will joint KeyCorp, which is based in Cleveland, Ohio.

Recent research by Cerulli Associates stated that banks “often fail to capitalize on becoming the provider of choice as investor wealth increases,” even though they have “the distinct advantage of being among many investors’ initial financial services providers.”

By offering financial wellness to its business clients, KeyCorp appears to be trying to exploit that advantage in order to compete with non-bank financial services firms.

“The HelloWallet platform provides clients with tools that can help them make more confident financial decisions. The platform provides KeyBank with a deep understanding of each individual client’s financial circumstances and goals that drive every interaction with clients,” KeyCorp said in a release last week.

The KeyBank–HelloWallet relationship began more than two years ago. Its roots can be traced to an October 2013 survey by KeyBank of more than 1,800 bank clients and others about their financial goals. More than 70% said they were not confident about planning for the future. The results were similar to HelloWallet’s proprietary research.

Joining forces, the two firms created a plan to:

Conduct further research across diverse segments to learn what drives KeyBank clients’ financial health and financial confidence, with a focus on evaluating financial outcomes and reported confidence levels.
Offer KeyBank clients HelloWallet’s 3 Minute Financial Plan, a program for delivering quick, unbiased financial insight and guidance, such as how much money to keep on hand for emergencies.
Use HelloWallet’s mobile and web-based applications to provide KeyBank clients with independent financial guidance—including a financial wellness score—and personalized budgeting and spending tools.

“The decision to sell HelloWallet aligns with both Morningstar’s and KeyBank’s long-term strategy,” said Brock Johnson, who heads up Morningstar’s global retirement and workplace business, in the May 31 release.

Morningstar has significantly enhanced its overall capability set since the acquisition of HelloWallet more than three years ago and we will continue to incorporate many of the financial wellness best practices into our broad-based solutions.

Lawsuit accuses oil and gas firm of not using Vanguard’s cheapest funds

Posted on July 6, 2017 by Editorial Staff -

The $500 million 401(k) plan of a Texas-based oil and natural gas exploration and “fracking” company was sued last week in Colorado federal court for not sufficiently using its buying power to obtain ultra-cheap institutional share class of Vanguard funds for its participants instead of Vanguard’s slightly more expensive retail share class funds.

The suit (Barrett v. Pioneer Natural Resources USA, Inc., (D. Colo., No. 1:17-cv-01579-WJM) was brought by plaintiff William Barrett, a participant in the Pioneer Natural Resources USA, Inc. 401(k) and Matching Plan which, on Dec. 31, 2015, had $500,187,123 in assets and 4,410 participants.

The annual expense ratios of the institutional (“Admiral”) share class of Vanguard funds in the Pioneer plan were between three and 16 basis points (0.03% and 0.16%) less than those of the retail (“Investor”) share class of otherwise identical Vanguard funds. Vanguard is not named as a defendant in the suit.

Vanguard fund fees

The suit also charges that Pioneer offered its participants mutual fund-based Vanguard target date funds instead of collective trust-based target dates funds, which would have cost about 8 basis points per year instead of 16 basis points.

The suit also alleges that Pioneer failed to negotiate lower recordkeeping fees with Vanguard. According to the compliant, the plan’s payments to Vanguard jumped from about $36 per participant in 2012 to about $66 in 2015. During that period, the number of plan participants rose 12%, to 4,410, and the assets under management rose about 40%, from $355.9 million to $500.2 million. The suit also claimed that the plan sponsor failed to negotiate lower revenue-sharing costs than they could have for non-Vanguard options in their plan’s investment line-up.

The suit claims that Pioneer didn’t document their decision-making processes. Consultants to 401(k) plan sponsors often warn that they are especially likely to be vulnerable to breach-of-fiduciary-duty lawsuits if they fail to have a documented process in place for reviewing the costs of their investment options and benchmarking them regularly.

In this suit, plaintiffs charge: “The Pioneer Defendants had no competent annual review or other process in place to fulfill their continuing obligation to monitor Plan investment choices for performance or to minimize expenses, or in the alternative failed to follow their own processes.”

Because the plan sponsor didn’t try to get the best possible deal for participants, the suits says, participants lost millions of dollars in market gains. The suit asks Pioneer to “make good to the plan all losses” that participants allegedly suffered.

Evaluations of the 10 Largest Health Savings Account Plans

Posted on June 29, 2017 by Editorial Staff -

T. Rowe Price Reopens the Market for Payout Funds

Posted on June 29, 2017 by Kerry Pechter -

During a presentation at T. Rowe Price’s investor day in February, Sebastien Page, the Baltimore-based publicly held fund family’s head of Asset Allocation, displayed a slide showing that between 2016 and 2020, $2.7 trillion in new money would flow into global multi-asset products.

T. Rowe Price’s strengths—strategic portfolio design, tactical asset allocation, and active security selection—would enable it grab a big chunk of that flow, allow it to overcome heavy competition in its “core U.S. retirement franchise,” and give customers the one-stop retirement solutions they need, Page told investors.

This week, T. Rowe Price and Page followed through on that promise by announcing the firm’s first entry into the managed-payout fund market. Called the Retirement Income 2020 Fund, it retools the company’s existing institutional 2020 target date fund (TDF) into a fund for individual investors. It pays out a 5% endowment-like income each year.

Asked why T. Rowe Price was just now entering the small, stagnant ($3.5 billion) payout fund market that Fidelity and Vanguard pioneered a decade ago, Page (right) told RIJ, “We’re focusing on the demographics and the demand for retirement income solutions. This product is a first step in the direction of a liquid solution, and over time we will introduce a suite of solutions. We ask what is best for participant and individual rather than how the category is doing.”

Here are the basics on this new income vehicle:

The Retirement Income 2020 Fund, which is designed for people to buy at age 65 and start taking income immediately, will issue payments in the middle of every month based on its 5% annual distribution rate, according to a T. Rowe Price release this week.

The fund’s annual payout will be calculated September 30 of each year as 5% of the average monthly net asset value over the trailing five years. The calculation is intended to reduce the effects of market volatility on the income payments. The minimum initial investment is $25,000.

The fund’s net expense ratio is 0.74%, according to the prospectus, and will initially be offered only with an Investor Class, which can be purchased direct from T. Rowe Price or through a financial advisor.

At the target date, the fund’s allocation to stocks is anticipated to be approximately 55% of its assets. The fund’s exposure to stocks will continue to decline until approximately 30 years after its target date, when its allocation to stocks will remain fixed at approximately 20% of its assets and the remainder will be invested in bonds.

“Shareholders generally will receive notice of the anticipated fund-level monthly payout amounts for the upcoming calendar year prior to year-end. The fund not intended at this time to be used in defined contribution retirement plan accounts,” according to the fund prospectus.

T. Rowe Price is hoping that investor familiarity with its TDFs will help ease them into its managed payout fund. “In theory, people want a salary replacement product with payments as high as possible, with no risk, for life. But that can’t be achieved in one product,” Page told RIJ.

“Our solution is to extend our TDF and keep it fully liquid, so that people can get out of it and come back into it if they want, and to offer simplicity. What will happen I think is that when people reach retirement, they’ll say, ‘Do I want to stay in the TDF and withdraw from it myself, or do I want to get this payout version of a TDF and go on auto-pilot?

“Think of it as an endowment model. In certain years, we might have to include some decumulation of principal in order to deliver the 5% payout. But if the underlying portfolio has an average return of 5%, then over time you will preserve your capital. It’s more likely than not that there will be minimal decumulation. In theory it could be a perpetuity, but the payout may be too high for that.”

T. Rowe Price is an active TDF manager, so this is not a TDF where the manager is simply allocating among index funds. “Two things are happening behind the scenes,” Page said. “First, the glidepath is downward sloping during retirement, with a declining equity allocation. So we will on average be selling appreciated equities.

“Second, we’ll be engaging in valuation-based tactical asset allocation over a six to 18-month time horizon. If equities are expensive we will rebalance into other assets. In addition, these are actively managed portfolios, so there will be security selection alpha.”

Mysterious category

Managed payout funds, created by target-date fund providers as a logical way to retain the assets of participants after they retired from TDFs in 401(k) plans, were first introduced by Fidelity in 2007. Vanguard followed in 2008 and has since become the leader in this space with almost $1.7 billion in assets. Fidelity has $154 million.

Fidelity’s series of Income Replacement Funds and Vanguard’s Managed Payout Fund aren’t based on their TDFs. One online example shows a Fidelity funds that makes payments over 20 years, starting at 5.4% a year. Vanguard’s Managed Payout Fund, a fund of index funds, has a 4% per year income target and an expense ration of 34 basis points.

It’s something of a mystery why managed payout funds haven’t been more popular. Vehicles that create annuity-like streams of monthly checks in retirement without the stifling illiquidity or the expensive guarantees of annuities would seem to match a growing need. But their initial marketing push was interrupted by the financial crisis and the products never really took off. The whole category has only about $3.5 billion, according to Morningstar.

American Funds’ Retirement Income Portfolios have attracted about $921 million in assets, second to Vanguard. Other players in the managed payout space are Voyage ($464 million), Schwab ($185 million), Franklin ($19 million) and BlackRock ($55 million).

The Retirement Income 2020 Fund will invest in other T. Rowe Price funds that represent various asset classes and sectors. It will have the same asset allocation, glide path, and underlying funds as the existing T. Rowe Price Retirement 2020 target date fund. Its allocation between T. Rowe Price stock and bond funds will change over time in relation to its 2020 target retirement date.

The Retirement Income 2020 Fund will be co-managed by Jerome Clark and Wyatt Lee, who currently co-manage many other T. Rowe Price Retirement Funds. Clark has 25 years of investment experience with T. Rowe Price; Lee has 18 years of investment experience with the firm.

When Growth is Not Enough

Posted on June 29, 2017 by Ben Bernanke -

The immediate postwar era, say 1945-1970, was an extraordinary period, economically speaking. Following fifteen years of depression and war, Americans were once again able to enjoy peace and prosperity. A substantial backlog of technological and commercial innovations was available to be exploited, and producers faced enormous pent-up demand for consumer goods and housing.

The federal government provided expansive support for education, through the GI Bill for example, and undertook major infrastructure projects like the interstate highway system. Importantly, for a time the U.S. economy had no effective competition, either from war-ravaged Europe and Japan or from not-yet-emerging markets.

There was plenty of economic change and what we would now call disruption, but strong catch-up growth, active economic policies, and America’s monopoly position resulted in widely shared economic gains. It’s not really surprising that the period evokes nostalgia as a time of national greatness.

However, as Robert J. Gordon has documented, the pace of technological and economic change in the middle of the past century was historically quite unusual and unlikely to be sustained. By 1970 or so, the backlog of commercial and technical opportunities available at the end of the war had been used up, and the conversion to a civilian, consumer-driven economy was complete.

Outside of a brief productivity spurt associated with the IT revolution, the past 45 years or so have been historically more ‘normal’ in terms of economic growth and productivity gains. Productivity growth has been particularly anemic over the past decade.

Equally important, American economic dominance faded, as Europe and Japan recovered and as what we now call emerging-market economies accounted for increasingly larger shares of global output and trade. The emergence of China as a global trading power was particularly disruptive, with adverse effects on the wages and employment opportunities of many American workers of moderate or lower skills.

In contrast, high-skilled workers tended to be favored by global economic integration, particularly those whose talents were scalable to the size of the market, such as managers of internationally active firms or of global hedge funds.

Of course, similar forces were playing out in Europe and elsewhere, with effects that depended on the policy response. In the United States, in the immediate postwar era, feelings of social solidarity and economic optimism had helped to generate political support for significant expansions in government spending on education, health, and infrastructure. The introduction of Medicare and expanded Social Security benefits provided economic security for the elderly in particular.

However, the postwar glow faded as America divided over a variety of big issues in the 1960s and 1970s, including the Vietnam War and the civil rights movement, and as economic growth began to slow. The Reagan revolution heralded a more constrained approach to economic policy, aimed primarily at fostering aggregate economic growth by empowering the private sector.

Examples of such policies include tax cuts and tax reform under Reagan, a number of consequential trade agreements under Reagan’s immediate successors, financial deregulation and welfare reform under Clinton, and more tax cuts and trade opening under the second President Bush. Missing from the mix, however, was a comprehensive set of policies aimed at helping individuals and localities adjust to the difficult combination of slower growth and rapid economic change.

Why policy was not more proactive in this area is an interesting question: Perhaps the failures of Lyndon Johnson’s Great Society and the inflationary monetary and fiscal policies of the 1960s and 1970s hurt the reputation of activist policies and helped revive American’s laisser-faire inclinations. Perhaps the stresses in the heartland were not sufficiently understood until it was too late. Perhaps the politics didn’t align.

Whatever the reason, it’s clear in retrospect that a great deal more could have been done, for example, to expand job training and re-training opportunities; to provide transition assistance for displaced workers; to mitigate residential and educational segregation; to promote community redevelopment; and to address serious social ills through addiction programs, criminal justice reform, and the like.

Greater efforts along these lines could not have reversed the adverse trends [inequality, etc.] I described at the outset—notably, Europe, which was more active in these areas than the United States, has not avoided populist anger—but they would have helped. They might also have muted the disaffection and alienation with which our political systems are currently grappling.

Which brings us to the present. Whatever one’s views of Donald Trump, he deserves credit, as a presidential candidate, for recognizing and tapping into the deep frustrations of the American forgotten man, 21st century version. That frustration helped bring Trump to the White House.

Whether the new president will follow through in terms of policy, however, is not yet clear. Trump’s economic views, which mirror the odd combinations of factions that make up his coalition, are a somewhat unpredictable mixture of right-wing populism and traditional supply-side Republicanism.

The policies that his administration has actually proposed or endorsed so far lean toward the latter, including health care bills that would significantly reduce insurance coverage among lower-income people, tax cuts for both individuals and corporations, and a relaxation of financial, environmental, and other regulations.

Policies that would more directly address the needs of the people who elected Trump, such as community redevelopment, infrastructure spending, job training, and addiction programs have recently received a good bit of rhetorical attention from the White House, but it remains to be seen whether that attention will be translated into programs and budgets.

Ironically, it may be that the most rhetorically populist president since Andrew Jackson will, in practice, not be populist enough.

Affluent People on Medicaid? It Can Happen

Posted on June 29, 2017 by Kerry Pechter -

The idea of “going on Medicaid” for nursing home care has always been a scary thought for me, and perhaps for you and your clients. It evokes images of forced bankruptcy, staphylococcus-ridden wards and helplessness at the hands of indifferent health care aides.

A story from Kaiser Health News, published in the New York Times last Sunday, painted a less grim picture. It cited figures showing that Medicaid covers the cost of care at many clean, well-lighted facilities for many upper-middle class Americans who have simply outlived their savings.

The article related the story of Alice Jacobs, a 90-year-old resident of a nursing home in rural Virginia. She once owned a factory and horses, raised four children, buried two husbands and amassed savings that she thought would last indefinitely.

But longevity risk eventually caught up with her. Years in an assisted living center consumed her savings, so she moved to a room at Dogwood Village, a non-profit, county-owned nursing home that receives about half of its $13 million in annual operating costs from Medicaid. People like her often don’t know that they’re on Medicaid, according to the article.

There are many like her. Some 70 million Americans rely on Medicaid, at an annual cost of $389 billion to the federal government (and another $120 billion or so to the states). Only 6% of Medicaid recipients use long-term services such as nursing homes at a given time, but they account for 42% of Medicaid spending.

If you’re an advisor, you and your clients probably don’t include Medicaid in their retirement income plans. High net worth individuals often own long-term care insurance. They are more likely to concern themselves with protecting their wealth from erosion by catastrophic illness or prolonged nursing home expenses than about running completely out of money and relying on Medicaid.

But many affluent people, who on average live longer than the poor, eventually rely on Medicaid. It’s not unusual for a hospital patient on Medicare to convalesce in a nursing home. After a hundred days, private savings either replaces Medicare or Medicaid begins. Individual Social Security benefits may be garnished to help supplement Medicaid.

Now, what of the future of Medicaid under the health care bill currently bumping its way through Congress? Will it still be there to serve as a safety net for the very old, like Alice Jacobs, an affluent person who simply outlived her savings?

The answer appears to be yes, but perhaps with limitations. The House version of American Health Care Act targets nursing home coverage directly by requiring every state to count home equity above $560,000 in determining Medicaid eligibility, according to Kaiser Health News. That would make eligibility rules tougher in states like California, Massachusetts, and New York where real estate is especially expensive.

The Senate version of the health bill would cut total federal and state Medicaid spending over the next 20 years by between $2 trillion and $3.8 trillion, according to the AARP Public Policy Institute. But the Republican leadership postponed the vote on that bill until sometime after the July 4 holiday because it could not find enough Republican Senators willing to commit to voting for it.

In any case, the new health care bills would merely reduce spending on Medicaid, not eliminate it. The core purpose of the Republican bills seems to be to kill the new taxes that helped pay for the Obamacare subsidies that enabled tens of millions of moderate-income people (as well as older people who aren’t yet eligible for Medicare, and people with pre-existing conditions) to buy private health insurance. Any impact on Medicaid, or on the nursing home patients who rely on it, will likely fall into the category of collateral damage.

If interest rates rise and Medicaid eligibility tightens, there might be an opportunity for life insurance companies to revive the concept of fixed deferred annuities with long-term care riders. These products, which fell victim to the low rate environment, showed promise a few years ago as an appealing form of high-deductible long-term care insurance.

Nationwide’s new ‘Care Concierge’ program fills an advisory vacuum

Posted on June 29, 2017 by Editorial Staff -

In a move that reveals the tasks that most financial advisors leave to others—like helping clients find an affordable nursing home for elderly parents, resolving healthcare issues and accessing counseling services—Nationwide has decided to share its employee assistance program with some of its variable annuity customers.

Starting July 24, new and existing owners of certain Nationwide variable annuity contracts will have access to a free, around-the-clock service that will provide “guidance on many of the complex questions and issues that can come up in retirement,” the Columbus, Ohio-based insurer announced this week.

The program, called Nationwide Care Concierge service, extends the benefits Nationwide associates currently receive, such as health advocacy, counseling and access to legal services, to members of select Nationwide variable annuity products, including Destination Navigator 2.0, Destination All American Gold 2.0, Destination Architect 2.0 and Destination Freedom+.

West’s Health Advocate Solutions, a leading clinical healthcare advocacy provider, will administer the Care Concierge service. It is estimated that Care Concierge will initially be available to 25,000 members, increasing to more than 30,000 members by the end of the first year. In addition to contract owners, the program extends to their spouses, dependent children, parents and parents-in-law. http://www.healthadvocate.com/site/

Members’ new benefits include:

Help for members who are turning age 65 as they navigate the Medicare system
Find doctors or specialists and make appointments
Research and review medical treatment options
Help with arranging care for aging parents or adult children
Counseling services to help with personal issues, life transitions or grief after the passing of a loved one
Managing health insurance claims and billing issues
Access to legal services for help with minor legal questions and issues
Concierge services for vacation or event planning, entertainment recommendations, gift ideas and more

“Health Advocate is an industry leader in health care advocacy serving over 50 million lives,” said Eric Henderson, senior vice president of Nationwide’s annuity and life insurance businesses, in a release. “We trust them with our own associates as we have a current partnership with them as an associate benefit, and we trust them with our members.”

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