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Morningstar, Inc., leading provider of independent investment research, today published a new study assessing plans from 10 of the largest Health Savings Account (HSA) plan providers:

Alliant Credit Union, Bank of America, BenefitWallet, HealthEquity, HealthSavings Administrators, HSA Bank, Optum Bank, SelectAccount, The HSA Authority, and UMB Bank.

Morningstar evaluated two aspects of the plans: their effectiveness as investment vehicles to save for future medical expenses and as spending vehicles to cover current medical costs.

Only one plan, the HSA Authority, received a positive assessment on both fronts. Morningstar positively assessed only four of the 10 plans as an investment vehicle and three of the plans for use as a spending vehicle. Morningstar’s product, HSA Bank, received a neutral rating in each category.

“Now that the U.S. House of Representatives and Senate have introduced healthcare reform bills that would double HSA contribution limits, analysis of HSA plans will become crucial as investors and policymakers strive to better understand the provider marketplace,” said Jake Spiegel, senior analyst for policy research, in a release.

Morningstar assigned each plan an overall assessment of positive, neutral, and negative. For accountholders looking to invest their HSA assets, the study analyzed the quality and cost of mutual funds offered as part of the plan’s “investment menu.” The evaluation of HSAs as a spending vehicle focused primarily on the maintenance fees charged by each plan.

“Our study establishes metrics that investors should consider when choosing an HSA,” said Leo Acheson, Morningstar’s lead research analyst for health savings accounts, in the release. “Participants using HSAs… should seek plans that offer a well-designed investment menu of cheap, high-quality funds. HSA plans from Bank of America, Health Equity, Optum, and The HSA Authority came closest to attaining that high standard.”

© 2017 RIJ Publishing LLC. All rights reserved.

Accenture transfers pension risk to American General and Mass Mutual

Accenture has completed the termination of its U.S. Pension Plan, announced in March 2016, by agreeing to transfer pension assets and about $1.0 billion in outstanding pension obligations to American General Life Insurance Company (AGL), a unit of AIG, and to MassMutual.

The insurers will provide annuities to Accenture retirees. The annuity settlement is part of Accenture’s three-step strategy to reduce its pension obligations:

Plan Termination: The Plan’s termination removed $1.6 billion of pension obligations, including about $600 million through lump-sum payments to approximately 7,000 active and former U.S. employees who elected to receive such payments, and $1.0 billion through the purchase of annuities from insurance companies.

Annuity Purchase: Accenture purchased group annuity contracts from AGL and MassMutual, which are each responsible for assuming a portion of the obligation to make future annuity payments to approximately 9,200 active and former U.S. Accenture employees and their beneficiaries. The transaction closed in late May and the insurers will assume payment responsibility in August 2017.

New Pension Plan: Accenture has created a new, fully funded, defined benefit plan with approximately $200 million of pension obligations with substantially the same terms as the Plan for approximately 550 active U.S. employees who remain eligible to accrue benefits.

Designated Plan fiduciaries selected AGL and MassMutual as the annuity providers. The selection was made in consultation with independent experts after a thorough annuity provider search and due diligence process, and in accordance with the U.S. Department of Labor’s “safest available annuity” standards. Key advisors to Accenture included Mercer (US) Inc. as lead strategic and annuity placement advisor.

Affected participants will soon receive letters with further details, an Accenture release said.

Envestnet | Retirement Solutions passes $25 billion under advisement

Envestnet | Retirement Solutions (ERS), which offers a customized, portable 3(21) and 3(38) outsourced fiduciary service called Envestnet Fiduciary Advantage, has reached a milestone in assets under advisement, the Chicago-based asset management platform provider announced this week.

As of March 31, 2017, ERS supports $25.89 billion in assets under advisement from 13,390 plans—representing a 7.5% growth in assets under advisement, and a 19% increase in plans, quarter over quarter.

ERS also announced that T. Rowe Price Retirement Plan Services, Inc., has begun offering access to Envestnet Fiduciary Advantage to plan sponsor advisors.

Envestnet Fiduciary Advantage provides:

• Investment allocation recommendations with corresponding research reports.
• Ongoing investment monitoring.
• Quarterly monitoring reports.

ERS utilizes Envestnet’s proprietary ERS SCORE Methodology to evaluate and monitor potential investments for retirement plans. The method seeks out portfolio managers that have demonstrated consistent risk control, an efficient risk-return profile, stability, and a reasonable fee structure.

More T. Rowe Price retirement plans offer Roth option

Among employer-sponsored retirement plans where T. Rowe Price Retirement Plan Services is the recordkeeper, 61% offer Roth contributions in their 401(k) plans, up from 50% at the end of 2015, according to a T. Rowe Price release this week.

This leap represented the largest one-year increase in the Roth contribution adoption rate since T. Rowe Price first tracked the data in 2007.

The new finding comes from the 2016 update of Reference Point, an annual benchmarking report by T. Rowe Price of employer-sponsored retirement plans based on the firm’s full-service recordkeeping client data.  

troweprice.com/referencepoint. 
Of the T. Rowe Price plan participant base:

• The number of plans with a 6% default deferral rate or more has doubled since 2011, with 33% of plans offering this higher rate in 2016. The industry standard for the past 10 years has been 3%.
• The percentage of plans adopting auto-increase of participant contributions and auto-enrollment has grown from 63.3% in 2011 to 71.5% in 2016. Similarly, auto-enrollment increased from 39.8% in 2011 to 54.5% in 2016.
• Participation rates continue to be strongly tied to the adoption of auto-enrollment, with participation 42 percentage points higher in plans with auto-enrollment than those without it.

Contribution trends
Pretax deferral rates now stand at 8%, the highest rate since before the financial crisis, thanks to plan sponsors raising the default deferral rate for their plans and improved market conditions.
Adoption of target date portfolios continued to rise. In 2016, 93% of plans at T. Rowe Price offered target date portfolios and 55% of participants invested their entire account balance in target date products, up nine percentage points since 2013.  

The increasing popularity of target date products could indicate that participants actively prefer a more managed approach or that they simply using their plan’s default option, the T. Rowe Price release said.

The percentage of participants with loans at the end of 2016 was 23.8%, its the lowest point since early 2009.

T. Rowe Price also found that as of year-end 2016:

• The ratio of direct rollovers to cash-outs continued to strengthen, with rollovers increasing to 81% in 2016, compared with 71% in 2009, and cash-outs decreasing to 19% in 2016, compared with 29% in 2009.
• Hardship withdrawals declined, with only 1.4% of participants in T. Rowe Price plans taking such a withdrawal, compared with the 2% industry average.

“The percentage of participants taking out a loan is down slightly and is at its lowest since 2009. We also saw a strengthening ratio of rollovers to cash-outs,” said Aimee DeCamillo, head of T. Rowe Price Retirement Plan Services, Inc., in a release. “We believe that educating participants on their retirement savings plan has had a direct, positive effect on reducing plan leakage.”

Survey methodology
Data are based on the large-market, full-service recordkeeping universe of T. Rowe Price Retirement Plan Services, Inc. retirement plans (401(k) and 457 plans), consisting of 642 plans and over 1.6 million participants.

Data and analysis cover the time periods spanning calendar years ended December 31, 2007, through December 31, 2016. Auto-increase and auto-enrollment data are based on plans that are eligible to receive this service. Loan availability and usage results are based on active participants with outstanding balances.

‘Fintech’ has arrived, EY survey shows  

Financial technology, aka “fintech,” adoption among consumers has surged over the past 18 months and is becoming mainstream, according to the latest EY FinTech Adoption Index. An average of 33% of digitally active consumers across the 20 markets in the Ernst & Young now use financial technologies.

Adoption in the US has doubled to 33% since the 2015 FinTech Adoption Index report. The US has the highest adoption rates of three of the top five fintech categories: financial planning tools, savings and investments, and borrowing.

“This adoption will likely increase with the next evolution of FinTechs, focused on data sharing, open APIs (application programming interfaces), biometrics, and application of artificial intelligence and robotics,” said Matt Hatch, Partner, Ernst & Young LLP and the EY Americas FinTech Leader, in a release.

The study was based on more than 22,000 online interviews of digitally active consumers across 20 markets. Emerging markets are driving much of the adoption, with China,  India, South Africa, Brazil and Mexico averaging 46%.

The EY FinTech Adoption Index identifies five categories of fintech services: 

• Money transfers and payment services
• Financial planning tools
• Savings and investments
• Borrowing
• Insurance

Money transfers and payment services are the most popular, with adoption at 50% in 2017 and 88% of consumers expecting to adopt in the future. The current adoption rate among US consumers is slightly higher at 52%. Online digital-only banks and mobile phone payments at checkout are the most popular services.

Insurance has also made huge gains, moving from one of the least commonly used fintech services in 2015 to the second most popular in 2017, rising to 24% globally. This has largely been because of the expansion into technologies such as telematics and wearables (helping companies to better predict claim probability) and in particular the inclusion and growth of premium comparison sites in the study. The US insurance fintech adoption rate is 20%.

Forty percent of fintech users regularly use on-demand services (e.g. food delivery), while 44% regularly participate in the sharing economy (e.g. car sharing). By contrast, only 11% of non-fintech users use either of these services on a regular basis.

In the US, the adoption rate is 35% for men and 28% for women. Millennials (25- to 34-year olds) have the highest adoption rate, followed by 35- to 44-year-olds. The adoption rate for Millennials in the US is 59% compared with the global average of 48%. The two rates for the 35- to 44-year-old age group are 50% and 41%, respectively.

Adoption is also growing among the older generations: 40% of digitally active 45-64 year olds and 17% of those 65 and older regularly use fintech services in the US. Money transfer and payments are the most adopted services across all age groups in the country.

The EY FinTech Adoption Index finds that fintech adoption is set to increase in all 20 markets. Based on consumers’ intention of future use, FinTech adoption could increase to an average of 52% globally. US adoption is expected to hit 46% in the near future. 

Are participants thinking “fast” or “slow”? Voya wants to know

Voya Financial has launched “Retirement Check-Up Report,” a resource that allows employers to measure the health of their retirement plans based on the digital enrollment and savings decisions participants make online and through their mobile devices.

The Retirement Check-Up Report leverages recent findings from Voya’s Behavioral Finance Institute for Innovation, a research initiative that “merges behavioral science with the speed and scale of the digital world to create large-scale solutions that are designed to help improve individual retirement outcomes,” according to a Voya release.  

The Retirement Check-Up Report follows a previous Voya whitepaper, “Using Decision Styles to Improve Financial Outcomes – Why Every Plan Needs a Retirement Check-Up,” by Shlomo Benartzi, Ph.D., a UCLA Anderson School of Management professor and a senior academic advisor to Voya’s Behavioral Finance Institute for Innovation.

“For the first time, employers can measure whether or not participants are engaging in a reflective thought process when making important decisions about their retirement plan,” Benartzi said in a release.

By looking at the digital behaviors that lead to certain savings rates and investment choices, employers will be able to see if they need to create a plan re-enrollment strategy, for instance.

The whitepaper examined how people make decisions using two different styles — “instinctive” (quick and without much thought) and “reflective” (slow and deliberate). Applying this to the digital environment, Voya was able to study and categorize the decision styles of retirement plans. A scoring system (the “Reflection Index”) was developed after observing whether or not:

• Participants paid attention online
• Participants gathered additional information  
• Participants made any trade-offs

Through this research, Voya found a significant correlation between a plan’s Reflection Index score and the average projected retirement income of its participants. A plan that had more instinctive decision-making participants was far more likely to have lower aggregated projected replacement income (below a 70% goal). Voya’s analysis found 90% of plans were “off track” in terms of projected income and were categorized as being “instinctive” due to their participants’ digital decision-making styles.

Other research has shown many individuals don’t take action to change their savings rates or re-balance their accounts once they enroll in a plan. The new Check-Up Report can serve as a tool to help plans learn when to “course correct” and consider plan re-enrollment. 

For thousands of Voya plan sponsors and the millions of participants they represent, Voya can create a unique Check-Up Report score report that lets an employer measure whether its plan, in the aggregate, is instinctive or reflective based on the digital activity of its participants.

Voya data from 428 plans with more than 25 participants. Participants with an annual salary below $20,000 or projected income replacement above 200% were excluded. Plans with an average Reflection Index below/above 2.0 (out of 3.0) are categorized as “Instinctive Decisions” / “Reflective Decisions.” In addition, plans with an average income replacement below/above 70% are categorized as “Not on Track” / “On Track.”

Details on the three dimensions are as follows: 

• Attention – did they log into the website or mobile app within past year? 
• Information gathering – did they click on projected retirement income to learn more? 
• Making trade-offs – did they explore different savings rates, retirement age or rates of return? 

One working paper study found that more than 70% of participants had not re-balanced their accounts during a ten-year period and nearly 50% had not changed the allocation of their contributions:  “How Do Household Portfolio Shares Vary with Age?” (John Ameriks and Stephen P. Zeldes, September 2004, Columbia University).  A Voya study of approximately 60,800 auto-enrollees between 2014 and 2016 found only about 5,500 (9%) made a fund change since being auto-enrolled.

Certain data is needed to produce a Reflection Index report.  Plans must have at least a 12-month history with Voya based on one of the Index dimensions, and also must have more than 25 employees in plan with salary data.  They must also have myOrangeMoney participant website functionality turned on to measure digital engagement.

Surprisingly, most investors prefer protection over growth: Cerulli

New research from Cerulli Associates, a global research and consulting firm, finds that when asked about their actual financial goals, U.S. investors are considerably more interested in risk reduction and protection than in aggressive portfolio growth.

“When asked directly whether they would prefer ‘to protect their portfolios from significant losses, even if it means periods of underperforming the market,’ 77% of respondents indicate that they would prefer the safer route,” said Scott Smith, director at Cerulli, in a release.

“After discussing investors’ portfolios with platform providers and advisors, there is a consistent fear of looming client defections resulting from performance that lags a benchmark, or index,” Smith. “But actual instances of this situation remain far more the outliers than regular occurrences.” Investors are far more concerned with whether they will be okay financially than whether their managers provided a few basis points of alpha.

Of course, the two are related, but in an extended bull market run, the industry has largely focused product development and implementation more on growth than protection.

“Further confounding financial professionals is that the preference for portfolio protection is cited by more than 80% of investors under age 40, an age bracket where most providers assume investors are most willing and able to accept portfolio risk,” Smith said. In short, providers must consider each investor’s goals and concerns before trying to optimize their portfolios.

Cerulli’s latest report, U.S. Retail Investor Products and Platforms 2017: Retooling for the Modern Investor, is designed to focus on retail investors’ product use, preferences, and awareness. This report gives attention to channels through which investors purchase products, the age and asset levels of investors who purchase various products, and other key investor profiles.

© 2017 RIJ Publishing LLC. All rights reserved.

Even as wirehouses and wealth management firms consider using digital automation to serve smaller-balance clients, Wealthfront, one of the first robo-advice firms, has added services exclusively for clients who bring $500,000 or more in taxable assets.

Wealthfront describes the service, called “Advanced Indexing,” as an improvement on “smart beta.” It is part of Wealthfront’s PassivePlus suite, which includes daily tax-loss harvesting and stock-level tax-loss harvesting known as Direct Indexing. The services cost a combined 0.25% annual expense ratio. 

In a release, Wealthfront gave credit for Advanced Indexing to its chief investment officer, Burton Malkiel, Ph.D. (author of the evergreen investment bible, “A Random Walk Down Wall Street”) and its vice president of research director, Jakub Jurek. Wealthfront also said it licenses PassivePlus from CSSC Investment Advisory Services, Inc. of Troy, Michigan.

Former trader Daniel Carroll founded in 2008 as KaChing, a website where professional investors managed virtual portfolios on KaChing and thousands of amateurs logged on to watch and mimic the trades in their own portfolios.

In 2009, KaChing began offering subscribers the ability to set up brokerage accounts that automatically mirrored the trades of professional money managers. The company changed its name to Wealthfront in 2010, after venture capitalist Andy Rachleff joined as CEO. Malkiel joined as CIO in November 2012. Wealthfront says it has $6 billion under management.

Advanced Indexing adds a level of sophistication to Wealthfront’s regular managed account offering. Where the basic service aims for a 50-50 equity-fixed income split using ETFs, Advanced Indexing divides the equity half into 30% individual stocks and 20% broad market equity ETFs, according to a white paper on Wealthfront’s website.

The weights of the individual securities are determined through a smart-beta or factor strategy, which uses five factors that affect future returns: value, momentum, dividend yield, market beta and volatility. The use of individual securities instead of ETFs lowers management expenses and raises the return on the equity portion of the account by about one%, Wealthfront claims.

There are two portfolio levels of Advanced Indexing. The first level involves holding 500 individual domestic stocks and has a minimum after-tax investment of $500,000. A higher level involves holding 1,000 individual domestic stocks and has a minimum after-tax investment of $1 million. The combined portfolio is subject to Wealthfront’s 0.25% advisory fee.

Advanced Indexing is bundled with Direct Indexing, a stock level tax-loss harvesting service that Wealthfront launched in 2013. It is available on accounts with balances of $100,000 or more. By using individual U.S. equity securities instead of total stock market ETFs, it lowers the portfolio’s expense ratio and enables more tax loss harvesting, which offsets its higher trading costs.

CSSC says on its website that “as of May 4, 2010, [we] patented decision-assistance technologies and methodologies that enable us to deal with the mass of information needed to comparatively evaluate such an expanded universe of choices. With it, we should be able to select any number of performance parameters, and separately weight each one, in order to score and rank the entire universe of available choices in a manner specific to each client’s individual needs. 

“Through use of this unique, new decision-assistance technology, we would enable consumers to determine for themselves which financial products and investment choices are truly best for them (fully objective, transparent and uninfluenced by the marketing hype, advertising claims, behind the scenes deals and relationships, and without any of the sales pressures, all too common within the traditional financial services marketplace).”

© 2017 RIJ Publishing LLC. All rights reserved.

Given all the reasons not to talk about Social Security—politicians would rather discuss cutting taxes, repealing Obamacare or investigating the president—it’s not surprising that so little is heard lately about patching the program’s demographically-driven funding hole.

But when the Old Age and Survivors Insurance program regains the spotlight, as it will eventually, policymakers will probably consider investing some of Social Security’s excess tax receipts in U.S. equities, as a recent report from the Center for Retirement Research at Boston College recommends.

“Investing a portion (a maximum of 40%) of Social Security trust fund assets in equities would reduce the need for greater payroll tax contributions or benefit reductions,” said the May Issue Brief. “If equity investment had begun in 1984 or 1997, trust fund assets would be higher than they are currently, despite two major stock market slumps and a financial crisis.”

Investing trust fund assets in equities instead of special-issue U.S. Treasury bonds would not be anymore disruptive to the stock market than the equity investing that U.S. state governments already do, wrote Gary Burtless of the Brookings Institution, Alicia Munnell, the director of the CRR, and CRR researchers Anqi Chen and Wenliang Hou.

In addition, “equity investments could be structured to avoid government interference with capital markets or corporate decision making; and accounting for returns on a risk-adjusted basis would avoid the appearance of a free lunch,” they wrote.

The idea of invigorating Social Security’s investment returns with equities isn’t new. It came up two decades ago when then-President Clinton asked the 1994-1996 Social Security Advisory Council to consider options to achieve long-term solvency. It came up again when the George W. Bush administration was considering letting taxpayers direct part of their Social Security contributions into private defined contribution accounts.

The CRR paper doesn’t suggest that Social Security should include individual accounts, or that the program turn into a hybrid of defined benefit and defined contribution.  They suggest that the equity investment start small and build up incrementally over many years until reaching a maximum of 40%. 

Despite their confidence in the higher returns of equities over risk-free government bonds, the authors expect equity returns to be lower in the future than in the past. The average price/earnings ratio of U.S. stocks, which was 25.8 as of last December, suggests future real returns of 3.9%.

The current cyclically adjusted P/E (CAPE) ratio is 28.7 (as of February 2017), suggesting a future long-term return of 3.5% percent. Assuming, as an alternative, that the growth rate of stock prices will equal the growth rate of GDP, the forecast is for 4.3% average real equity returns. The median projection for future returns, the authors write, is 3.9% real and 6.6% nominal.

© 2017 RIJ Publishing LLC. All rights reserved.

Imagine a new luxury sedan without lane departure warnings. Imagine an upscale hotel without free Wi-Fi in the lobby. Imagine a Wall Street trader without a Bloomberg. Imagine yourself without a smartphone. Imagine a restaurant that still serves cappuccino in those tall transparent ‘Irish coffee’ glasses. 

Now imagine a 21st century financial advisor who:

• Doesn’t engage with clients on social media
• Doesn’t use Google analytics to track website traffic
• Doesn’t offer e-signature and e-delivery
• Doesn’t use video conferencing
• Doesn’t use automated email alerts and text messages

Sad, right? Often the case? Yes. Only 40% of advisors do those things, according to the Fidelity 2016 eAdvisor Study sponsored by Fidelity Clearing & Custody Solutions (FCCS), a unit of Fidelity Investments. But it beats the same survey’s 2014 results, when only 30% of advisors were tech-savvy enough to be called “eAdvisors” by Fidelity.

Fidelity, incidentally, owns eMoney Advisor, the advisor technology firm. So like Broadridge, FIS, Advicent and other digital technology firms that are all campaigning these days for the adoption of their products by brokerages and advisors (and predicting the imminent failure of those who don’t), the retirement industry giant has a horse in this race.       

Fidelity’s new survey says that “eAdvisors” (whom it defines as using twice as many different technologies as their peers) enjoy: 

• 42% higher assets under management (AUM) than tech-indifferent advisors, up from 40% higher AUM in 2014
• 35% more AUM per client than tech-indifferent advisors, up from a 14% gap between eAdvisors and their tech-indifferent peers in 2014
• More $1M+ clients than tech-indifferent advisors
• 24% higher compensation than tech-indifferent advisors
• Higher satisfaction with their firm and career than tech-indifferent advisors

In addition, 54% of eAdvisors have client segmentation strategies, versus 40% of “tech indifferent” advisors. eAdvisors are also more likely to serve Gen X/Gen Y clients and to have plans to add digital advice technology within the next two years.

Based on the 2016 eAdvisor study findings, Fidelity identified four best practices that eAdvisors tend to employ:

• Embrace a strong online presence to generate leads and engage with prospects and clients
• Use technology to both simplify and enhance the client experience
• Take advantage of technology solutions to create a holistic view of clients’ lives
• Communicate and collaborate via technology to maintain and deepen client relationships

The survey also found that:

• 64% of eAdvisors have a clear call-to-action on their websites than other advisors (35%), and more likely to utilize compelling visual images and content to engage visitors.
• 94% of eAdvisors engage with clients/prospects on social media (Facebook, LinkedIn or Twitter) compared with 74% of tech-indifferent advisors.
• 54% of eAdvisors use Google Analytics to track website traffic, versus only 28% of tech-indifferent advisors.
• Two-thirds of eAdvisors offer clients e-signature options and nearly all provide e-delivery of statements and reports directly via email, as well as online access to such documents (95% and 94%, respectively).
• 77% of eAdvisors provide interactive or visual reports, versus 38% of tech-indifferent advisors.
• 87% of eAdvisors use data aggregation tools to provide the total picture of clients’ assets and liabilities. This is an 18% increase in use from eAdvisors in Fidelity’s 2014 study and nearly double the number of non-eAdvisors using such tools (46%).
• 53% of eAdvisors use automated email alerts for client updates and 35% send text messages regarding updates or administrative tasks (versus 19% and 18% of tech-indifferent advisors, respectively).
• More than half (52%) of eAdvisors communicate with clients via videoconferencing or online conferencing.
• 65% of eAdvisors use collaboration technology in five or more ways with their clients, versus only 25% of tech-indifferent advisors.

Fidelity has developed a brief quiz for advisors interested in learning how they stack up on the “eAdvisor” scale, according to a recent release. The quiz asks advisors about their use of technology and, based on their feedback, identifies opportunities for integrating technology more deeply into their practices.

© 2017 RIJ Publishing LLC. All rights reserved.

Cimini to lead Voya’s retirement product business

Voya Financial has hired Jeff Cimini to lead its Retirement Product organization, the company announced this week. He will oversee product management, development, strategy, pricing, competitive intelligence, Voya Institutional Trust Company, and Voya’s advisory services for plan sponsors and participants.   

Cimini will be based in Voya’s Windsor, Connecticut office.  He will be a member of the Retirement leadership team and report to CEO of Retirement Charlie Nelson, effective July 3.

Most recently, Cimini was head of strategy for TIAA’s Institutional Financial Services division, and also served as head of sales and client services for TIAA’s select institutional clients.  Previously, he was head of Personal Retirement for Bank of America Merrill Lynch. He also spent more than 20 years with Fidelity Investments.  

Cimini’s experience includes stable value portfolio management, fund analysis, investment consulting and sales, consultant relations, defined contribution investment only (DCIO) sales and investment consulting services. He managed sales and distribution for the Fidelity Investments Life Insurance Company division and served as president of its three life insurance entities.

Cimini holds a bachelor’s degree in finance from the University of Massachusetts at Amherst and a Masters in finance from Boston College.

Strategic beta: An edge for active TDF makers?

How do active managers slow down investors’ flight to passive funds? Some of them will adopt “strategic beta” techniques, according to survey results published in the second quarter 2017 issue of The Cerulli Edge–U.S. Retirement Edition 

“Use of strategic beta strategies is the most likely feature of next-generation U.S. target-date products” was the sentiment of 38% of asset managers polled by Cerulli Associates, the Boston-based consulting firm.

“Strategic beta” used to be called “smart beta.” The term generally refers to a form of indexing where fund managers systematically overweight an index portfolio toward securities with attributes that are associated with higher returns, such as momentum or volatility.   

The goal is to achieve higher risk-adjusted returns than conventional market-cap-weighted index funds, at a cost somewhere between the cost of active funds and index funds. Whether it allows investors to defy the inherent correlation between risk-and-return by delivering higher returns without more risk hasn’t been proven, according to Morningstar.     

But it’s the kind of differentiator that actively managed TDF manufacturers can use in their fight against pure indexing. They could use strategic beta, for instance, to try to mitigate TDF investors exposure to “sequencing risk” as they approach retirement, beyond just changing a fund’s asset allocation.

(Sequencing risk is the risk to near-retirees or recent retirees that an ill-timed stock slump might force them to liquidate depressed assets for current income, thereby locking in losses.)

“Strategic beta strategies allow active managers to compete with pure passive on cost while retaining some of the value-add tenets associated with active management,” said Dan Cook, analyst at Cerulli, in a release. 

“For the larger target-date providers, strategic beta series can also serve as another option in their target-date product suite, giving plan sponsors the choice between passive, active, and strategic beta.”

But adding strategic beta to TDFs will likely “add another layer of complexity to the due diligence process” for defined contribution retirement plan sponsors and fiduciaries,” Cerulli noted. Asset managers who promote this potential enhancement must be prepared to explain and document its benefits.

Federal class action suit against Voya is dismissed

A 401(k) class action lawsuit that involved plan sponsor Nestle, recordkeeper Voya Financial and managed account provider Financial Engines has been dismissed by a federal district court judge in New York, NAPA net reported this week.

The suit, filed by participant Lisa Patrico and others in September 2016, claimed that Voya had breached its fiduciary duty to participants when it allegedly devised an arrangement with Financial Engines to collect excessive fees for investment advice services.

The judge disagreed. “The Complaint fails to allege facts showing that Defendants were ERISA fiduciaries with respect to their fees,” wrote Judge Lorna G. Schofield of the U.S. District Court for the Southern District of New York.

© 2017 RIJ Publishing LLC. All rights reserved.

TIAA completes purchase of Everbank

TIAA has completed its acquisition of EverBank Financial Corp and its wholly owned subsidiary EverBank. The transaction was originally announced August 8, 2016.

“The acquisition significantly expands TIAA’s existing retail banking and lending products and complements the company’s full suite of retirement, investment and advisory services,” and will allow TIAA to continue to serve its more than 15,000 institutional clients, a TIAA release said.

This acquisition also gives TIAA an employee base and business operations in Jacksonville, Florida, the bank’s headquarters, and other key markets.  TIAA also plans to continue to expand its digital capabilities for banking customers.

EverBank reported $27.8 billion in total assets and $19.3 billion in total deposits as of March 31, 2017.

The new, combined bank’s legal entity name is TIAA, FSB, but for the immediate future, the bank will continue to use the TIAA Direct and EverBank brands. 

The following management changes, announced last August, are effective today.

Kathie Andrade will continue in her role as CEO of TIAA’s Retail Financial Services business. She will also serve as chairman of the board of TIAA, FSB.

Blake Wilson, Everbank’s president and chief operating officer, will now serve as president and CEO of TIAA, FSB. He will remain a member of the board of directors of the new bank.

Robert Clements retired as EverBank Financial Corp’s chairman of the board and chief executive officer upon the completion of the acquisition.

Transamerica enriches variable annuity payout options

Transamerica has made enhancements to the Transamerica Income Edge living benefit rider, along with launching two new lower cost investment options.

Introduced in 2016, Transamerica Income Edge is a living benefit available with most Transamerica variable annuities aimed at enabling Baby Boomers and Generation X individuals to effectively plan their retirement.

Changes to the optional living benefit include a fee reduction, along with shortening the waiting period from five years down to three years for a customer to be eligible to start receiving a higher living benefit withdrawal percentage.

If investors wait three years after investing to begin taking withdrawals, they would be eligible for an automatic one percent increase on their withdrawal percentage, which escalates based on a tiered age scale.

After three full years, investors with a single life benefit who begin withdrawing between the ages of 59-64 can receive 5% income for life; those who begin withdrawing while in the 65-79 age range can receive 6% income for life; and if waiting until age 80 or older, the investor could receive 7% income for life.

Transamerica has also launched two new index portfolios approved for rider eligibility through Transamerica Income Edge.

TA U.S. Equity Index seeks investment results corresponding generally to the performance of the S&P 500 Index. TA International Equity Index provides access to large and mid-cap equities in developed markets outside the U.S. and Canada.  

Pensions still suffer from soft corporate bond rates: Milliman

Milliman, Inc., the global consulting and actuarial firm, today released the results of its latest Pension Funding Index (PFI), which analyzes the 100 largest U.S. corporate pension plans.

In May, the deficit for these plans rose by $22 billion from $257 billion to $279 billion, due to a decrease in the benchmark corporate bond interest rates used to value pension liabilities. As of May 31 the funded ratio had fallen to 83.8%, the 1.10% decline partially offset by investment returns.

“Corporate pensions have experienced a 23 basis point drop in discount rates since the start of the year, depleting funded status gains accumulated during the first quarter,” said Zorast Wadia, co-author of the Milliman 100 PFI. “While liabilities continue to pile up as discounts rates decline, investment returns have been above expectations for first five months of 2017, preventing further deterioration to pension funded status.”

• Under an optimistic forecast, with interest rates reaching 4.11% by the end of 2017 (4.71% by the end of 2018) and 11% overall annual asset gains, the funded ratio would climb to 91% by the end of 2017 and 104% by the end of 2018. 
• Under a pessimistic forecast, with a 3.41% discount rate at the end of 2017 (2.81% by the end of 2018) and 3.0% annual asset returns, the funded ratio would decline to 80% by the end of 2017 and 73% by the end of 2018.

To view the complete Pension Funding Index, go to http://us.milliman.com/PFI.  

ICI offers fresh data about Roth IRAs and traditional IRAs

The Obama Department of Labor’s fiduciary rule, by asserting DOL authority over Individual Retirement Accounts, has put a spotlight on IRAs. New reports from the Investment Company Institute (ICI) offer fresh data about owners of traditional, “rollover,” and Roth IRAs.

The reports, “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2015” and “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2015,” are based on ICI’s IRA Investor Database, which houses account-level data for millions of IRA investors from year-end 2007 through year-end 2015.

The reports show:

Roth IRA investors tend to be younger than traditional IRA investors. At year-end 2015, 31% of Roth IRA investors were younger than 40, compared with 16% of traditional IRA investors. Only 25% of Roth IRA investors were 60 or older, compared with 40% of traditional IRA investors.

That’s because traditional IRAs are typically opened by rollovers, while Roth IRAs are more often started with contributions. Most (85%) of new traditional IRAs in 2015 were opened only with rollovers and more than half of traditional IRA investors with an account balance at year-end 2015 had rollovers in their account. About 71% of new Roth IRAs were opened only through contributions in tax year 2015.

People who open IRAs with contributions (not rollovers) tend to keep contributing. More than seven in 10 traditional IRA investors who contributed for tax year 2014 also contributed for tax 2015. Eight in 10 Roth IRA investors with contributions for 2014 also contributed for 2015.

Roth IRA owners are more likely to invest in equity mutual funds than are traditional IRA owners. At year-end 2015, 66% of Roth IRA assets, versus 54% of traditional IRA assets, were invested in equities and equity mutual funds, exchange-traded funds (ETFs), and closed-end funds. Some of these differences reflect the fact that Roth IRA investors tend to be younger, and younger investors typically allocate more toward equities. 

Allocation to target date funds and non-target date balanced funds were the same between Roth IRAs and traditional IRAs (18%), but Roth IRAs had less allocated to bonds and bond funds (7%) than traditional IRAs (16%). Roth IRAs also had a lower allocation to money market funds (6%) than traditional IRAs (9%).

Because annual withdrawals from traditional IRAs are mandatory starting at age 70½ but Roth IRA owners aren’t required to take withdrawals, their withdrawal activity is much lower. In 2015, only 4% of Roth IRA investors made withdrawals, compared with 24% of traditional IRA investors.  

The IRA Investor Database includes data on of IRA contributions, rollover, and withdrawal activity, and the types of assets that about 17 million investors hold in these accounts. It supplements existing household surveys and IRS tax data about IRA investors. 

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