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This Couple Needs Your Advice
A friend, now 64 years old and near retirement, recently asked me for suggestions about income planning. Despite relatively ample savings and real wealth, he and his wife aren’t sure if they can afford to stop working for the next 20 years or more.
Though not members of America’s “one percent,” this self-employed professional couple is comfortable. They hold some $1.2 million in brokerage accounts at one of the big regional firms. They own two homes, valued at $1.23 million and $435,000.
The couple likes and trusts their current broker/advisor. Their well-diversified accounts have been growing. But the broker can’t answer detailed questions about the amount of fees they pay. For future income, she offered just one suggestion, that they invest $400,000 in one of her own firm’s variable annuities, which offers a living benefit and deferral bonus.
How would you advise this couple? As a broker, advisor or planner, how you would solve their “case” based on the rough numbers provided in the boxes below? We’d like to hear about solutions that would help them:
- Build a safe bridge from now to retirement, minimizing sequence of return risk.
- Fill the gap between their desired retirement income and income from existing guaranteed sources.
- Cover their sons’ graduate school expenses if necessary.
- Travel abroad each year in early retirement.
- Maintain their homes, both built in 1989.
- Generate $50,000 to $70,000 per year from savings.
- Protect this healthy, active couple from longevity risk.
- Assure a legacy of $500,000 or more per child.
Here are a few essential facts about the couple, whom will call “Andrew” and “Laura.” They earned a combined $303,000 last year from their business ($200,000 AGI), which they will shut down when they retire. They also earned $27,600 from renting their second home. Andrew is 64 years old and plans to work until age 70 (while reserving the right to retire earlier).
Laura is 63 years old and would like to start working part-time immediately, which will reduce the couple’s income. Starting at age 65, she’ll begin receiving $585 per month from a pension that has an optional lump-sum value of $85,000. They have long-term care insurance.
Andrew and Laura will have a significant shortfall in guaranteed retirement income. They expect to receive a combined $60,000 each year in Social Security benefits if they both claim at full retirement age, but $81,000 if they both claim at age 70. They will also receive about $7,000 from Laura’s pension. They would like a total of $140,000 in real pretax retirement income. So they have an “income gap” of $50,000 to $70,000.
Here’s some of the data Andrew and Laura provided:
What would you tell Andrew and Laura to do? Take systematic withdrawals? Practice the 4% rule? Use time-segmentation or buckets? Set up a bond ladder? Buy immediate and/or deferred annuities? Luckily, their level of savings gives them (and you) a lot of options.
Submit your income planning ideas by July 1, 2017. Be as specific (given the limits of the data) or as general as you wish. Explain how you would be compensated and provide a ballpark figure of annual advisory and investment costs. Tell us what type of broker, advisor or planner you are, what licenses/degrees/designations you have and how you usually get paid. We’ll publish your suggestions in a future issue.
© 2017 RIJ Publishing LLC. All rights reserved.
Don’t cut Medicaid, say Ivy League doctors
Health care experts at MIT and Harvard protested the government’s threatened cuts to Medicaid, pointing out in an op-ed in the New York Times this week that “roughly one in three people now turning 65 will require nursing home care” and that Medicaid will eventually cover “over three-quarters of long-stay nursing home residents.” Though that will be a minority of U.S. retirees, it still means millions of people, including members of the middle class.
David Grabowski of Harvard Medical School, Jonathan Gruber of MIT and Vincent Mor of Brown University wrote in protest of the American Health Care Act, which has passed the House and is now with the Senate. The AHCA would cut Medicaid by over $800 billion. The budget released by President Trump last month would cut another $600 billion over 10 years, they said.
According to research by Grabowski, Gruber and Mor:
¶ Medicaid accounts for one-sixth of all health care spending in the United States. Nearly two-thirds of its budget pays for older and disabled adults, primarily through long-term care services in nursing homes. Medicaid pays nearly half of nursing home costs for those suffering from the effects of Alzheimer’s or stroke.
¶ In some states, overall spending on older and disabled adults amounts to as much as three-quarters of Medicaid spending. They will be harmed if the program shrinks by 25% (as under the A.H.C.A.) or almost 50% (as under the Trump budget). If those cuts are made, many nursing homes would turn away Medicaid recipients as well as those who might need Medicaid eventually. Many older and disabled Medicaid beneficiaries will have nowhere else to go, they said.
¶ Lower Medicaid reimbursement rates would likely cause reductions in nursing home staffing, particularly of nurses. A 10% lower reimbursement rate leads to an almost 10% decline in the ability of nursing home residents to perform common functions of daily living. It raises their odds of persistent pain by 5%, and the odds of a bedsore by two percent.
¶ Lower-quality nursing home care would lead to more hospitalizations and higher costs for Medicare. Each year, one-quarter of nursing home residents are moved to hospitals, where the daily costs are more than four times as high. A 10% reduction in nursing home reimbursements causes a five percent rise in the chance that a resident will need to be hospitalized.
© 2017 RIJ Publishing LLC. All rights reserved.
Three Lessons Learned
A Philadelphia electronics tycoon who made his fortune manufacturing resistors and capacitors for the computer industry once told me in an interview that he’d learned his most important business lesson when he was still a young boy in 1930s Belarus.
He said: “My father told me, Someday a man will put a lot of money on a table. He’ll tell you, ‘It’s yours. Take it. Don’t worry, no one will ever know what happened here.’ But don’t take it. Even if you’re sure that no one will ever know, leave the money on the table.”
I still don’t know exactly what that story meant, aside from being a general admonition about the wisdom of honesty, but I’ve never forgotten it.
As someone famously wrote, a person can learn everything he or she really needs to know before graduating from kindergarten. In my case, it took a while longer. By my late 20s, however, life had taught me a few homely but memorable lessons about leadership, entrepreneurship, and cross-cultural relations.
Hard lesson from softball
Every August, my scout troop camped for a week in eastern Pennsylvania. We canoed, hiked and played softball. During my last summer in the troop, I was captain of one of the two softball teams. We would slug it out every afternoon through the week.
No one told us how to choose up sides, so before the first game I quickly and quietly recruited the best, most athletic players. No one objected, not even the other captain. And every afternoon, for six consecutive afternoons, my team dominated the other side. We routinely “batted around” on offense and shut out our opponents on defense.
I felt an unfamiliar sense of pride: I may have been a so-so ballplayer, but I was clearly a gifted manager. The pride, however, preceded a sudden fall.
Before the seventh and last game, the assistant scoutmaster approached me. He said it was time to break up my team and create at least one fair contest before camp ended. I felt ashamed—especially when I sensed his disappointment that I didn’t reach that conclusion on my own. The lesson: Good leaders look out for the larger group.
Everyone in the ‘swim pool’
In June of tenth grade, a friend and I wanted to celebrate the conclusion of a game we had organized in emulation of the plot of a movie called The 10th Victim, which neither of us had seen. (Our version was like “tag,” but more extended and elaborate. It gave boys an excuse to introduce themselves to girls, and vice-versa.)
But how should we organize the celebration? Biking near a golf-and-swim club a few days later, I stopped to ask the pool manager if he would rent me the pool for an evening. He said yes. The price was $50. That was a low hurdle even then, and I thought, forget The 10th Victim; I’ll ask everybody at school to contribute a buck to a “swim pool.” Brilliant. It seemed like a smoking-hot idea right up until 7:20 Monday morning, when I faced my homeroom classmates and thought, “This will never work.”
I was wrong. Before the bell rang, my pockets were stuffed with grimy, crumpled portraits of George Washington. By the end of last period, I had a roll of over $120. I paid the swim club manager his $50 and bought a trunk-load of hamburgers, soda and chips.
The following Saturday night, dozens of kids were splashing around in the Olympic-sized pool. I worked all through the party, bagged trash afterwards and cleared $10 for myself. I don’t remember meeting any of the girls. But I learned about an invisible energy in the universe called entrepreneurship.
When in Romania
Years later I was ordering kabobs at a food kiosk in a government-run seaside resort in Romania. That sad country was still ruled by the bloody Ceausescu regime. I was traveling with (and covering, as a reporter) a college jazz band on a goodwill tour sponsored by the US Department of State.
A dozen of us had just returned from the Black Sea beaches, and we were famished. But there was a long queue at the kabob stand, and none of us had the energy or patience to stand in it. Somehow I was appointed to take kabob orders for everybody and to wait in line while they relaxed.
Eventually I reached the kiosk window and ordered 18 lamb kabobs. Big mistake. The cook and then the crowd lined up behind me exploded in protest when they realized what I was doing. Our efficient American strategy, which made perfect sense to us, didn’t play well here.
Maybe they got angry because they were, after all, Communists. Or maybe any line of hungry people would have rebelled when they saw how long my 18-kabob order would make them wait. On the other hand, they’d have waited just as long if our whole group had lined up, or so I wanted to frame it.
But it was the egalitarian principle that mattered to the Romanians—one customer, one or two kabobs—and, as strangers in a strange land, we should have thought more carefully before bucking the system in our oblivious American way. The lesson: When in Rome, or Romania, heed the local customs.
The best perk
The electronics manufacturer mentioned at the beginning of this story was the late Felix Zandman, founder of Vishay Intertechnology, a company he named after his parents’ village. They died in Nazi camps; the teenage Zandman spent much of World War II crouched in a root cellar. He described his cinematic life in the book, “Never the Last Journey.”
When I met Zandman, he was still in his mid-60s. Over his career, he had invented photo-elastic coatings, which enabled the stress-analysis of aluminum aircraft wings without dangerous test flights. He had developed resistors that allowed jet fighters to warm up and take off faster and warp-resistant barrels that gave tanks greater firing range.
At the end of our conversation, I asked a callow question. I knew from his biography that he owned homes in the U.S. and Europe and decorated them with expensive art. More than one sovereign government had honored him. He was able to pay an author $100,000 just to write his life story.
I wanted to know: Of all these perks, what did he like best about being rich? Looking through a window at the four-door Lincoln parked outside his office, he said with satisfaction, “Having a car and driver.”
© 2017 RIJ Publishing LLC. All rights reserved.
In fiduciary suit, Northrop Grumman settles with participants for $16.75 million
Northrop Grumman has reached a $16.75 million settlement with its employees and retirees, represented by Schlichter, Bogard & Denton law firm, who had alleged that Northrop fiduciaries violated their fiduciary duties to participants in two 401(k) retirement plans, by “improperly causing those plans to pay Northrop for administrative services.”
The parties filed a motion for approval of the settlement Tuesday before Judge Andre Birotte Jr. of the U.S. District Court for the Central District of California.
Schlichter first filed the Northrop case in 2006. The trial began in Los Angeles on March 14, 2017, and the settlement was reached after three days. The settlement covers conduct between Sept. 28, 2000 and May 11, 2009.
The settlement does not cover claims raised in Marshall v. Northrop Grumman Corp., a second case against Northrop filed by Schlichter, Bogard & Denton on September 9, 2016. It has similar allegations for conduct from 2010 to the present Marshall v. Northrop remains pending in the same court.
Schlichter, Bogard & Denton pioneered excessive fee 401(k) litigation on behalf of employees and retirees. Since 2006, the firm has filed over 20 such complaints and secured 13 settlements on behalf of employees. In 2009, the firm won the only full trial of a 401(k) excessive fee case against ABB. In 2015, the firm achieved a unanimous victory on behalf of employees, in the only 401(k) excessive fee case taken by the U.S. Supreme Court. In 2016, the firm brought excessive fee suits against 12 major universities with defined contribution retirement plans.
© 2017 RIJ Publishing LLC. All rights reserved.
A target date fund for RMDs, from Fidelity
Fidelity’s new Simplicity RMD mutual funds are designed to make it easier for people over age 70 to rebalance their tax-deferred holdings after taking Required Minimum Distributions. In 2017, the first Baby Boomers will reach age 70½, the age when annual RMDs become mandatory.
The fund series “combines an age-appropriate and professionally-managed investment strategy with an optional automated calculation and distribution method to satisfy annual RMD requirements on the investor’s behalf,” said a Fidelity release this week.
Each Fidelity Simplicity RMD Fund consists of a blend of equity, fixed-income and short-term Fidelity mutual funds. The blend automatically becomes more conservative as an investor ages. Each fund name includes a date, and investors choose the fund that aligns with the year they turn 70.
The Fidelity Simplicity RMD Funds with longer time horizons will invest in a greater percentage of equities, while the funds with shorter time horizons will emphasize fixed-income and short-term assets.
There are five Simplicity RMD Funds. Those with longer time horizons hold higher percentages of equities:
- Fidelity Simplicity RMD Income
- Fidelity Simplicity RMD 2005
- Fidelity Simplicity RMD 2010
- Fidelity Simplicity RMD 2015
- Fidelity Simplicity RMD 2020
For example, a traditional IRA owner who turned 70½ in 2015 would select the Simplicity RMD 2015 Fund. The table below shows the ranges of investor birth dates for which each fund was created and each fund’s total expenses.
Once people invest in a Simplicity RMD Funds, they can set up distributions through Fidelity’s automatic withdrawals service. Fidelity automatically calculates and distributes the investor’s RMD each year, monitoring withdrawal activity.
To support the Fidelity Simplicity RMD Funds, Fidelity offers these resources:
- ‘Viewpoints’ articles about taking RMDs by the IRS deadline, and how to include RMDs as part of an overall retirement income strategy
- Answers to frequently-asked questions about RMDs
- An RMD calculator to help determine annual minimum distribution amounts
- Access to Fidelity’s online Retirement Distribution Center, which estimates each account’s RMD and allows customers to set up, track and manage IRA withdrawals
- Fidelity’s Learning Center, providing a variety of resources, including: “To delay or not to delay? Options for taking your first Minimum Required Distribution (MRD)”
© 2017 RIJ Publishing LLC. All rights reserved.
Political turmoil sidelines UK pension reform
A review of the UK’s defined benefit (DB) pension system has been cast into doubt by last week’s election result, when the Tories lost their majority in the House of Commons, IPE.com reported.
The Conservative Party pensions minister had begun to review DB plan regulation, and the Department for Work and Pensions (DWP) published a “green paper” on the topic last February.
Now all bets on pension review are off. With negotiations about the UK’s exit from the European Union—i.e., “Brexit”—due to occur in less than two weeks, former Labor pensions spokesman Gregg McClymont said major pension reforms were unlikely soon. “A delay was always likely given Brexit. This has just taken it to a new level,” he said.
Theresa May had also reduced the post of pension minister to an undersecretary role in her administration, he added, which means that pensions have a weaker voice.
The DWP green paper would not be scrapped outright, however, said Sir Steve Webb, a pensions minister from 2010 to 2015. Now director of policy at Royal London, Webb said: “The government can’t do anything particularly bold – a big shakeup of pension tax relief for example. It would have to be targeted and incremental.”
With 318 seats—13 fewer than before the election and eight short of a majority–the Conservative Party is still remains the largest party in the UK parliament. To create a majority, it may form a coalition with Northern Ireland’s DUP, which has 10 seats. Labor picked up 29 seats in the election.
“Age has become an issue – it’s a party political divide in a way it has not been before,” McClymont said. “Younger voters have [always] supported Labor but the extent of the correlation is unheard of. It’s driven by economic reality.
“If you’re under 40 your income has been eroding and your ability to grow wealth assets is almost non-existent. You could argue that the parties’ promises need to catch up with that. We might get into a bidding war between who can promise the most to younger generations.”
As a result, over time auto-enrolment could become a bigger political issue, he added, as more people entered the pension savings arena and saving levels rose. Kevin LeGrand, president of the Pensions Management Institute, echoed that view:
“At this early stage it looks like the younger generation have been influential in changing the political landscape. If that proves to be correct, the recent focus of policies on pensioners’ interests on the basis of the strength of the grey vote may be reversed. This could result in a different policy approach between the generations.”
© 2017 IPE.com.
Honorable Mention
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.
© 2017 RIJ Publishing LLC. All rights reserved.
Cost of Conflicted Retirement Advice – Economic Policy Institute, by state
Morningstar Enters the Indexed Age
Responding to demand from broker-dealers who intend to sell indexed annuities under the Department of Labor’s Best Interest Contract Exemption, Morningstar Inc. has added new data and new functionality to its Annuity Intelligence unit. Morningstar began rolling out the new services in April.
The Chicago-based firm, best known for mutual fund research, is adding information on 284 fixed deferred and fixed indexed contracts from 29 fixed and indexed annuity providers to its existing variable annuity database, once known as VARDS. Advisors can use the data to compare products or screen them for suitability for each client.
The new annuity universes are available now as an option in the Morningstar Annuity Intelligence Tool. The tool spares advisors the chore of combing through dense annuity prospectuses or sketchy marketing materials to glean key product data.
“We describe the products and explain how the benefits operate. We don’t just copy and past language from the prospectus,” according to Kevin Loffredi, senior manager, Annuity Solutions. “We get rid of jargon. People wanted to see that kind of information on the fixed indexed as well as the variable side. I’ve wanted to get fixed and indexed contracts into the tool for five or six years. Our clients said they want one source for all their annuity contract information.”
In recent years, sales of indexed annuities have grown much faster than sales of variable annuities. Indexed annuities thrive as an alternative to certificates of deposit in a low interest rate environment. As liabilities, they are less risky to issuers than variable annuities. That allows them to offer highly competitive lifetime income benefit riders.
The new service was hastened by the Department of Labor fiduciary rule. The rule, which goes into partial effect this week but may eventually be revised or repealed by the Trump administration, required brokerages to sign a Best Interest Contract Exemption [BICE], pledging that the client’s interests, not the advisor’s, drove the sale, if they want to sell either indexed or variable annuities to IRA owners and receive insurer-paid commissions on the sales.
“After the DOL came out with the fiduciary rule, which said that indexed annuities would be subject to the BICE, broker-dealers were knocking on our door, asking, ‘How can you help us prove that we’ve acted in the best interest of the client?’ Loffredi said. “We knew we needed to get indexed annuities into our research tool and our new Best Interest Proposal Tool. We decided to include multi-year guarantee annuities and market-value adjusted annuities as well.”
For brokerages, each step of a variable or indexed annuity sale under the BICE has to be documented. The brokerage firm, if called to account for an advisor’s sales recommendations, needs to be able to show that the selection of a particular contract was based on a client’s specific needs and desires, as opposed to the amount of compensation the sale would bring the advisor or the firm.
In addition to data on contracts and a digital record of client-advisor interactions, the Annuity Intelligence Tool provides data to a separate software application, Morningstar Best Interest Proposal Tool. To a degree, it takes annuity product selection out of a firm’s or an advisor’s hands and turns it over to an algorithm to ensure objectivity.
For the brokerages, the Annuity Intelligence Tool provides a decision tree that allows a firm to filter the entire universe of annuity products by carrier, by range of benefit structures, by fee levels and surrender charge periods, and by variable investment options or index crediting strategies. Contracts that meet the firm’s criteria go on its product shelf for advisors to sell. 
The Morningstar Best Interest Proposal Tool provides a decision tree for advisors, allowing them to screen the available variable and indexed annuities for the contract with, for instance, a lifetime income benefit rider that best fulfills a client’s retirement income needs and matches his or her time horizon and premium size.
Morningstar isn’t the only player in this market. Cannex, the Canadian-American firm that many intermediaries rely on for fresh annuity price quotes, introduced a wizard last fall that also helps advisors choose the right annuity and document the process for compliance with the terms of the Best Interest Contract Exemption.
But Cannex and Morningstar both said that their services can peacefully coexist.
“There is very little overlap,” Gary Baker, president of Cannex, told RIJ. “CANNEX provides actual quotes and illustrations on the embedded guarantees in various types of annuities based on the profile of the client and their intended use of the contract. Morningstar’s service, including fixed annuities, provides a ‘qualitative’ comparison of products whereas we provide a ‘quantitative’ comparison. We have common clients that will use both services.”
Cannex provides price quotes and contract specifics on single-premium immediate income annuities, deferred income annuities, and qualified longevity annuity contracts (QLACs), while Morningstar’s Annuity Intelligence Tool doesn’t. Captive agents of mutual life insurers, not brokerage advisors, historically sell most fixed income annuities.
“We look at firms like Cannex and eMoney as our partners in meeting the needs of advisors,” Loffredi said. “We’re not a financial planning firm, and we’re increasingly building out our integrations with companies like MoneyGuidePro and SalesForce. We have APIs and integrations where they, or us, can link in seamlessly. We’re not trying to disrupt the marketplace that’s out there now. We’re not looking to replace anyone. We can’t do it on our own.”
© 2017 RIJ Publishing LLC. All rights reserved.
Variable Annuities Suffer Steep Net Outflows
Variable annuity sales dipped to their lowest level in a decade in the first quarter of 2017, and annual sales are on track to fall below $100 billion. The industry suffered net outflows of 17.9% in the first quarter.
At $22.95 billion, new sales of variable annuities were down 4.22% from Q4 2016 and down 10.43% from the same quarter last year, according to Morningstar’s quarterly VA Sales and Asset Report.
In the shrinking market, Jackson National, TIAA and Lincoln Financial were the only top-10 sellers to see a sales increase from the previous quarter. The rest of the top 10—who accounted for 80% of VA sales in the quarter—had double-digit sales declines from the previous quarter. Nearly every issuer had negative growth for the quarter.
But a 6.07% burst of first-quarter growth in the S&P 500 boosted total VA assets under management to $1.86 trillion, up 2.73% from the previous quarter and 4.49% from the first quarter of 2016.
The evolving VA market has been buffeted by both positive and negative crosswinds. The rising stock market has been a tailwind; the interest rate environment has been a headwind for VAs while favoring fixed indexed annuities. Some firms have left the business. MetLife, once a big seller, has pulled back and spun-off its retail annuity business to fledgling Brighthouse Financial.
Voya Financial will soon be out of the book of VA business built by its predecessor, ING US. AXA has shifted its focus in part to a structured variable annuity that has no living benefits and therefore has low capital requirements. Jackson National’s popular Elite Access B, an accumulation-only product, also has relatively low reserve requirements.
Most recently, the VA business has been hurt by the weight of its own product fees and by the DOL fiduciary rule, which makes it harder for advisors to accept third-party commissions when selling VAs to IRA owners.
With new sales of $4.46 billion in the quarter and a 19.43% market share, Jackson was by far the overall leader. Not counting TIAA, which sells group variable annuities, Jackson, had a big sales lead over the next biggest seller of individual variable annuities, AXA, which sold $2.5 billion in the quarter. Three firms, Jackson, TIAA and AXA, accounted for 58% of variable annuity sales in the quarter.
Among other firms with more than $100 million in sales, only five firms had increased sales compared to last year’s first quarter and the previous quarter: Jackson, AXA, Fidelity, Northwestern Mutual, and Great-West.
“Much of [Jackson’s sales surge] can be attributed to the fact that their living benefits, which are not the richest in the industry, require no managed volatility subaccounts or limits on equity exposure,” wrote Morningstar senior project manager Kevin Loffredi, in the quarterly report.
Jackson’s sales lead was most conspicuous in the Independent broker-dealer channel, where two-thirds of its sales in the quarter took place. The Lansing, MI-based insurer, a unit of the UK’s Prudential plc, was also the top seller in the wirehouse and bank/credit union channels.
The top-selling product in the first-quarter was Jackson’s Perspective II 7-year contract, which offers living benefit riders. Jackson’s Elite Access B, an accumulation-focused contract that offers exposure to alternatives, was the eighth best seller. AXA’s Structured Capital Strategies indexed variable annuity rose to third place in quarterly sales from 53rd place a year ago.
The captive agent channel, where TIAA dominates, led all channels in sales share with 39%, down slightly from 39.9%. The Independent channel share was 35.5%, up 1.8%. Each of the four other channels each had less than 10% share and were relatively unchanged.
TIAA, which started selling group variable annuities in 1952, has a 24% share of the total variable annuity assets under management, with $460.6 billion as of March 31, 2017. The next four largest AUM holders—MetLife, Jackson National. Prudential and Lincoln—have a combined 32% of the assets. The next five life insurers manage about 22.5% of the assets.
MetLife did not report sales of the MetLife branded contracts, Loffredi said. Morningstar is still receiving their assets and are combining their numbers with those of Brighthouse Financial.
© 2017 RIJ Publishing LLC. All rights reserved.
‘Don’t Expect Action By the SEC’
The Security and Exchange Commission called this week for public comments on “standards of conduct” that apply to financial advisors when serving retail investors. But the SEC announcement only “unleashes more uncertainty into an already confused regulatory environment,” said an email bulletin this week from a prominent pension law firm.
The firm, Drinker Biddle, warned that “boards of directors, service providers and intermediaries should not expect action in the near future by the SEC with respect to a uniform standard of conduct, as this is not the first time the SEC has called for comments on this issue.”
So no one should hold his or her breath waiting for the SEC to push the Department of Labor, and its disruptive fiduciary rule, out of the brokerage space. The retirement industry and its legal teams are receiving about as much useful new information from the SEC about the fiduciary rule as Dorothy Gale got from the Scarecrow when she and Toto stopped to ask for directions to Oz.
A turf conflict between agencies
The SEC’s intervention has long been sought by the investment industry, which is accustomed to and familiar with the SEC’s rules and their gentle enforcement by the industry’s internal watchdog, the Financial Industry Regulatory Authority. It is not accustomed, and resents, additional regulation by the DOL.
The DOL’s 2016 fiduciary rule for the first time asserted its authority over advisor behavior not just in the pension arena but also in the retail IRA arena. The rule affected commissioned sales of mutual funds and annuities to individual IRA owners, and was seen by many in the investment industry as an invasion of SEC-regulated and state-regulated territory by Labor.
Some members of the investment industry are concerned that, without an assertion of authority by the SEC, the DOL standards of conduct might eventually apply to all financial advice. It’s impractical, some have said, for advisors to have one code of ethics for clients’ IRAs and another for their taxable accounts.
The fiduciary rule doesn’t affect all advisors. It won’t have much impact on the conduct of Registered Investment Advisors, who have always had to act as trusted advisors. And it doesn’t affect fee-only planners for the same reason.
But the rule will have, and already has had, far-reaching effect on commission-paid advisors at brokerage firms, and on the product manufacturers who rely on those advisors to distribute their annuities and mutual funds.
Ambiguously, the rule goes into partial effect tomorrow, but now the DOL and the SEC have raised hopes—or fears, depending on your perspective—that the rule might be altered by promising to reopen it for review before January 1, 2018, when the rule is scheduled to take full effect. NAPA Net reported today that the DOL Secretary has sent a Request for Information on the fiduciary rule to the White House Office of Management and Budget as a first step toward reviewing the rule.
What we know now
Drinker Biddle issued an alert on June 6. According to attorneys Diana E. McCarthy and Joshua M. Lindauer:
- The Fiduciary Rule will become effective on June 9, 2017.
- On June 9, providers of investment advice to retirement clients will become fiduciaries and the “impartial conduct standards” will become a requirement of the prohibited transaction exemptions.
- Between June 9 and January 1, 2018, the DOL “will not pursue claims against fiduciaries who are working diligently and in good faith to comply with the Fiduciary Rule and its exemptions.”
- On June 1, 2017, the SEC issued a request for public comment on the standards of conduct applicable to investment advisers and broker-dealers when they provide investment advice to retail investors.
- Absent further action by the DOL, intermediaries and advisers utilizing the BICE or PTE must be in full compliance with all of the exemptions’ conditions on January 1, 2018.
- Between June 9 and January 1, 2018, financial institutions and advisers must comply with the “impartial conduct standards” when relying on the BICE and PTE. They must give act in accordance with ERISA’s standards of “prudence and loyalty” to clients, charge “no more than reasonable compensation,” and “make no misleading statements about investment transactions, compensation, and conflicts of interest.”
(Some advisors have wondered they can be sued for alleged violations of their fiduciary duty after the rule goes into effect. RIJ has been told that the danger of a new wave of class-action suits against brokerages—akin to the wave of suits against 401(k) sponsors and providers in recent years—has been exaggerated by opponents of the rule.)
Given the Trump administration’s and the Republican Congress’ manifest distaste for federal regulation, they are likely to attack the Obama fiduciary rule. Meanwhile, financial firms are like football fans, waiting nervously while the “zebras” gather around a video booth and watch a replay to either confirm or overturn a ruling on the field—and make a decision that could well determine the outcome of the game.
© 2017 RIJ Publishing LLC. All rights reserved.
Jackson National switches to DoubleLine from PIMCO for a VA subaccount
Jackson National, the largest U.S. seller of variable annuities, plans to remove Pimco’s Total Return Bond investment option from its product line-up and transfer the subaccount’s $3.5 billion to Jeffrey Gundlach’s DoubleLine Capital, Reuters reported this week.
The new subaccount option will be called JNL/DoubleLine Core Fixed Income. Pimco’s flagship Total Return investment strategy had been one of Jackson National’s variable annuity subaccount options since 1998. Jackson continues to offer the JNL/Pimco Income Fund and the JNL/Pimco Real Return Fund.
The $3.5 billion mandate would be a significant win for DoubleLine’s core-related fixed-income strategies. Core-type assets represented only $12 billion of $105 billion in assets under management at DoubleLine as of March 31. JNL/DoubleLine Core Fixed Income will invest in corporate securities, emerging markets debt and mortgage-backed securities.
PIMCO has seen large net outflows during the extended low-interest rate era, as money has shifted away from its actively-managed bond funds to passively managed or indexed bond funds where the expenses are more likely to be lower.
But DoubleLine Core Fixed Income Fund is actively managed, and at 48 basis points (0.48%) per year, its institutional shares cost slightly more than the 46-basis-point expense ratio of PIMCO Total Return Bond Fund. The year-to-date return has been 3.32% for PIMCO Total Return and 2.85% for DoubleLine. For comparison, Vanguard Total Bond Market Index Fund, Admiral shares, has an expense ratio of five basis points and a year-to-date return of 2.62%.
The $8.8 billion DoubleLine Core Fixed Income Fund has been growing strongly, whereas its much larger Pimco Total Return counterpart, with $73.8 billion in assets, has only recently shown signs of stabilization after outflows reduced its size to a quarter of its all-time high of $293 billion in mid-2003.
© 2017 RIJ Publishing LLC. All rights reserved.
BlackRock enhances iRetire platform for advisors
BlackRock has added a retirement income component to its iRetire platform to help advisors illustrate and demonstrate asset allocation and decumulation strategies and scenarios to clients while using the asset manager’s CoRI index—which tracks the cost of $1 of lifetime annual income—and its iShare ETF portfolios.
Managing “the ups and downs of the market without knowing how long their client is going to live” makes a retirement advisor’s job difficult, said a BlackRock release, adding that iRetire gives advisors “the tools to engage in a relatable, repeatable conversation that is sophisticated enough to help manage the problem and simple enough to use with clients.”
iRetire is an “end-to-end retirement planning framework that financial advisors can use to take clients to and through retirement,” the BlackRock release said. It is backed by Aladdin, BlackRock’s proprietary institutional multi-asset technology platform. Launched in 2015, iRetire is now available to some 70,000 advisors, BlackRock said.
Big asset managers like PIMCO, the actively managed bond fund firm, and BlackRock, a multi-trillion-dollar ETF specialist, are trying to compete for the attention of the many advisors who want to address their clients’ needs for safe retirement income through diversification and without insurance products, such as annuities.
In a “give-em-the-razor-and-sell-em-the-blades” approach, both BlackRock and PIMCO have developed proxies for estimating cost of retirement income along with products with which to produce the income. In the defined contribution space, PIMCO has developed a PRICE (PIMCO Retirement Income Cost Estimate) and multi-asset, active bond funds. BlackRock created the CoRI (Cost of Retirement Income) Index and a lineup of target-date bond funds that track it.
A BlackRock spokesperson told RIJ this week that iRetire’s new capabilities “at and in retirement,” which goes beyond its previous capabilities, enable advisors “to maintain regular check-ins with their clients to manage the journey through retirement, allowing them to make adjustments as necessary (after seeing what impact those adjustments could have). Some clients may have immediate or unexpected needs, so iRetire allows advisors to quickly demonstrate the impact to sustainable spending after these immediate needs are met.”
© 2017 RIJ Publishing LLC. All rights reserved.
To attract youth, TIAA’s new robo offers socially-responsible investments
TIAA has launched a new online managed account service called TIAA Personal Portfolio, which the non-profit investment and insurance provider is calling the first service to deliver digital access to socially responsible investments (SRI) along with traditional investment options.
TIAA Personal Portfolio offers passive, active and SRI options at five risk levels, ranging from conservative to aggressive, including:
- Basic: A passive investment strategy comprised of a mix of low-cost index funds and ETFs
- Insight: An active investment approach comprised of funds that seek to outperform the market
- Impact: An active investment strategy that prioritizes funds that meet socially responsible investing criteria without sacrificing returns
The service requires a minimum account balance of $5,000 and charges annual advisory fees of just 30 basis points (0.3%). Once the minimum is satisfied, new contributions can be made in any amount.
According to a release, TIAA Personal Portfolio lets new clients establish accounts “in less than 10 minutes, by inputting their financial objectives and risk levels. They receive personalized portfolio recommendations, down to the specific fund, before financing their account.”
TIAA Personal Portfolio offers:
- Professional investment management, including asset allocation and ongoing strategy research, resulting in an investment portfolio aligned to individual goals, risk tolerance and investing preferences
- Access to professionals to provide more extensive support, when and if it’s wanted
- Automatic rebalancing and daily account oversight to help keep investment strategy on track
- Account summary and detailed reporting to track progress towards goals and investment performance
- Online account setup and performance management optimized for mobile
- The offering expands on TIAA’s personalized investment services and other managed accounts. The organization also offers in-person financial services at more than 160 offices across the country in addition to phone representatives who are licensed, registered and trained to provide advice.
© 2017 RIJ Publishing LLC. All rights reserved.
Honorable Mention
Seven in 10 large plans report “leakage” as a problem or concern
In a new study, “HR Perspectives: A Survey of Larger 401(k) Plans,” T. Rowe Price reports the results of a survey of human resource and benefits managers administering plans with assets of $100 million or more.
The survey, which took place in late 2016 and drew on telephone and online responses from 269 executives, found that plan sponsors are “taking steps to offer a number of automatic programs, matching contributions, stretch matches, and more to drive successful retirement outcomes.”
Among the survey findings:
- 41% of plan sponsors say helping retirees manage income from their 401(k) is a major strategic goal for their plan.
- Almost half (48%) of plan sponsors say they have a formal metric to track the retirement preparedness of their employees. Those offering a metric report higher use of auto-escalation (used by 63% of those with a metric versus 52% of those without), and periodic enrollment of non-participating employees (used by 55% with a metric versus 41% without).
- 52% of the 48% who use a formal metric say the metric was provided by their recordkeeper; 25% report using a proprietary metric that their company developed independently; 21% sourced the metric from a consultant or adviser.
- Almost two-thirds (64%) “feel better” about 401(k) participant retirement preparedness compared with two years ago.
- 64% ranked “enabling employees to retire at their preferred retirement date” as one of their major 401(k) plan goals, making it the third highest-ranked goal.
- 89% of plan sponsors offer matching contributions.
- 51% of the 89% offer a traditional matching formula and 38% offer a “stretch match” (the more you contribute, the larger the match) to encourage higher contribution rates.
- 83% of plan sponsors offer target date funds (TDFs)
- 96% to 98% are satisfied with the various types of target date funds; 60% are very satisfied.
- 88% of plan sponsors that offer target date funds use them as a qualified default investment alternative (QDIA).
- About half of plan sponsors that offer target date funds report using their recordkeepers’ proprietary funds.
- 70% say that leakage of retirement plan assets (due to defaults on plan loans, hardship withdrawals, and cash-outs) is a major or minor problem for their plans.
- Plans that have a leakage problem are offering financial wellness programs (but not individual financial counseling), education about the potential effect of leakage on savings goals, or debt management tools and services.
American College goes global with education offerings
The American College of Financial Services and GAMA International are partnering to develop two streamlined credentials for international markets: a three-course skills training designation for agents and advisors and a three-course management designation for leaders. Each credential would take about a year to complete.
The College will rely on the GAMA distribution arrangement as the primary international outlet for selected College products that include the following:
- The Retirement Income Certified Professional (RICP) designation program
- The new Wealth Management Certified Professional (WMCP) program that will be launched in the US this fall and will be made available at a future date in global markets
- The Master of Science in Management (MSM) degree program in advanced executive leadership
Each of the two organizations will continue to maintain ownership of its own intellectual property and trademarks. The proposed agreement does not include any US distribution partnership and does not impact current arrangements The College has in a few selected global markets.
GAMA International is a worldwide association serving the professional development needs of more than 8,000 field leaders in the insurance, investment and financial services industry. The American College of Financial Services, founded in 1927, is the nation’s largest non-profit educational institution devoted to financial services.
The College offers such financial planning designations as the Retirement Income Certified Professional (RICP), Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and education leading to the Certified Financial Planner (CFP) Certification.
Nationwide provides resources to simplify fiduciary rule
As the first phase of the Department of Labor’s (DOL) Conflict of Interest Rule goes into effect this week, the Nationwide Retirement Institute is providing resources and support to help advisors incorporate a best interest process with clients.
Starting June 9, those who give advice on investments within retirement accounts will be held to the Impartial Conduct Standards, which have three requirements:
- Advice is in the best interest of the customer
- Compensation is reasonable
- Statements about investment transactions, compensation and conflicts of interest are not misleading
The full requirements will go into effect on Jan. 1, barring further regulatory or legislative changes.
The Nationwide Retirement Institute’s DOL website provides resources for firms and advisors wrestling with the complexities of the fiduciary rule, such as identifying any new requirements as a fiduciary, taking a close look at the Best Interest Contract Exemption, understanding how the regulations may affect their business and how to address common client questions. These new tools will be available starting June 9, and will also help advisors implement a prudent process that puts clients’ interests at the center of advice-giving, simplifying complex topics like:
- Optimizing Social Security filing decisions
- Estimating health care costs in retirement
- Planning for long-term care expenses
- Understanding market dynamics
Nationwide helps advisors serve a variety of client needs, whether working in a commission-based or fee-based model. With the acquisition of Jefferson National, operating as Nationwide’s advisory solutions business, Nationwide offers resources leveraging tax-deferred investing to accumulate wealth. Financial professionals can access the educational video on Maximizing Tax Deferral, visit the Knowledge Bank, or call the Advisor Support Desk at (866) 667-0564.
Millennials are confident—overconfident—of inheriting money: Natixis
Over three-quarters (78%) of Americans say it’s up to them, not the government, to provide enough money to live in retirement, but 77% are counting on family support to help fund their retirement, according to Natixis Global Asset Management.
A nationwide-survey of 750 individual investors by Natixis found:
- Millennials are twice as likely as Boomers to think that a financial inheritance from their parents or grandparents and support from their children will be important to meeting their retirement needs
- 62% of Millennials, compared to 31% of Boomers, expect to receive an inheritance to help fund their retirement.
- 47% of Millennials, compared to 24% of Boomers, say family assistance with finances and housing will be an important part of their financial security in retirement.
- 49% of Americans, including 60% of Millennials, and 43% of Boomers, will rely on cash from the sale of their homes and/or business to finance retirement.
- 33% of Millennial couples and 35% of Boomer couples say their spouse’s retirement savings will be very important.
- 47%) of Baby Boomers and 35% of Millennials believe Social Security will be an important part of their retirement income.
- 41% of Millennials don’t expect Social Security benefits will be available by the time they retire.
- 98% of Americans agree their personal savings and investments, including workplace retirement savings and other qualified retirement plans will be essential in retirement.
- 68% of Millennials expect to receive an inheritance, but 40% of Boomers don’t plan to leave one.
- More than half of Boomers (57%) think they won’t have anything left for a legacy, and another 35% plan to spend freely on themselves before they die.
Americans were the least likely among those in the 22 countries and regions surveyed to expect to leave an inheritance. Nine in 10 Mexicans expect to leave an inheritance, but only 37% expect to receive one. Over half (53%) of Americans expect to donate part of their estate to charity, compared with a global average of 37%.
“Younger investors are starting to plan and save for retirement earlier in life, in part because of the availability of workplace retirement savings plans,” said Ed Farrington, EVP of Retirement at Natixis Global Asset Management. “Yet many are underestimating the impact of taxes, inflation and increased longevity on their retirement savings, and are overestimating the planning their parents have done.”
© 2017 RIJ Publishing LLC. All rights reserved.
Assets under Management of 15 Publicly Traded U.S. Asset Managers in DST kasina survey
Complex Annuities for a Complex Era
When sophisticated investors hold long positions in equities but worry about market volatility, they can create “collars” with out-of-the-money puts and calls. The options establish a floor under potential losses on the investment and a ceiling on potential gains.
Indexed variable annuities are packaged products that give investors a similar way to hedge their bets. These accumulation-oriented products, available since 2011, offer more upside (but less protection) than indexed annuities and more protection (but less upside) than variable annuities.
How do they differ from ordinary fixed indexed annuities? In the conventional FIA, most of the premium is invested in bonds, with the rest used to buy options on an equity index. If the index goes up over a certain designated term, the options appreciate and the gains are credited to the accounts, up to a cap. There’s no risk of loss, aside from fees.
With an indexed variable annuity, you get a similar division of the principal between bonds and options. But the caps on gains are higher because the investor accepts some downside risk. Typically, in a down market, the issuer assumes the first, say, 10 points of loss and the investor accepts losses beyond that point.
Despite the conceptual complexity, Allianz Life, AXA, MetLife, and CUNA Mutual have all been selling IVAs, with increasing success. AXA’s IVA sales were $2.62 billion in 2016, up from $1.45 billion in 2015. Allianz Life’s IVA sales more than doubled in 2016, to $1.31 billion from $611 million the year before.
In May, both Allianz and Brighthouse (MetLife’s retail spinoff) announced new versions of their IVAs. Hoping to appeal to fee-based advisors, Allianz Life issued Index Advantage ADV, which doesn’t pay a commission. To appeal to commission-based advisors who want lower fees, and are willing to accept lower caps in exchange, Allianz Life issued the NF version of the same product. Brighthouse Life, meanwhile, announced the Shield 10, an extension of MetLife’s Shield series of “index-linked separate account annuities,” which are registered indexed annuities, not variable annuities.
These types of products offer a kaleidoscope of indexes and crediting strategies that might baffle a newcomer to indexed products. Both the Index Advantage ADV and NF and Brighthouse’s Shield 10 include trigger options whereby the investor receives a pre-set return if the index is flat or up. Index Advantage ADV and NF offer only year-to-year crediting terms, four indices and a $10,000 minimum initial premium. Shield 10 offers year-to-year crediting periods, three indices, and has a $25,000 minimum premium.
Do these products offer too many choices? Yes and no. To the frustration of annuity manufacturers, advisors are famous for loving product flexibility but hating product complexity. IVAs (except for CUNA’s) introduce a twist that some people have trouble getting their heads around: Downside “buffers” that protect the client from, say, the first 10 percentage points of annual loss but leaving the so-called tail risk to the client.
If you revel in choice, if your client is looking for a middle path between indexed and variable annuities, and if you’re not afraid to sell a product that has only a very short performance history, an IVA might be the solution. As for income generation, these are accumulation products. Their obligatory annuitization options, like that perfunctory black doughnut in the trunk of your car, will probably see little use.
Index Advantage NF
Responding to broker-dealer input, Allianz Life decided to bring out a version of its four-year-old Index Advantage contract for fee-sensitive clients. This commission-based, called Index Advantage NF, offers the same index allocation choices as the original but without the product fee. Both the new NF version and the original contain two sleeves.
First, there’s a non-indexed investment sleeve where investors can put money in mutual funds. The sleeve offers three investment options: a Growth Index, Moderate Index and a Government Money Market fund. In the NF version of Index Advantage, there’s a 1.25% mortality and expense risk fee on the money in this sleeve. In both versions, the fund fees range from 65 to 73 basis points.
But the mutual funds are not the main attraction here. Most clients will be interested in the indirect exposure to equities through the index options. The investor can choose to have his money track the S&P 500, Russell 2000 Small-Cap, Nasdaq-100 and EURO STOXX 50).
If that seems like a lot of choices, there’s more. The product currently offers three crediting strategies, with different caps for different indices and higher caps for the version than for the NF version.
Protection. As long as the index is flat or up over each one-year term, the investor receives a credited return of 3.75% for the original version and 1.5% for the NF version—no matter what the actual index gain may be. If the index is down, the investor loses nothing (other than the fees deducted quarterly from the contract).
Performance. The caps under this crediting method for the original version are 11.75% for money linked to the S&P 500 Index, 11% for the Nasdaq-100 Index and 15.75% for the Russell 2000 and EURO STOXX 50 Indexes. The caps for the NF version are 7.25% for the S&P 500 and Nasdaq-100 Indexes and 10.75% for the Russell 2000 and EURO STOXX 500 Indexes. The issuer absorbs the first 10% of losses in down years.
Guard. The caps under this crediting strategy for the original version are 11.5% for the S&P 500 Index, 10.75% for the Nasdaq-100 Index, and 12.25% each for the Russell 2000 and EURO STOXX 50 Indexes. The caps for the NF version are 7.25% for the S&P 500, 7% for the Nasdaq-100 Indexes, and 8.5% for the Russell 2000 and EURO STOXX 500 Indexes. But, instead of a buffer, this product provides a floor. The investor absorbs the first 10% in losses in down years. Allianz Life covers the downside beyond that.
Index Advantage ADV
The Index Advantage ADV is a contract has a six-year surrender period and the same cap rates as the original commission-based Index Advantage but with a first-year surrender charge of 6.5% and an annual product fee of 25 basis points. It has the same cap rates as the commission-based version, but not the 1.25% annual fee by which the insurer recovers the commission. The advisor charges his own management fee instead.
“This category is booming because of the need to get dollars off the sideline and out of cash,” said Matt Gray, senior vice president of product innovation at Allianz Life. The Index Advantage series has a return of premium death benefit, and a performance lock feature. If you’re satisfied with your account value at mid-year, you lock it in for the rest of the year. “These differentiators and the market need have been the drivers of our sales,” he told RIJ.
Shield 10 from Brighthouse Life
MetLife is in the process of spinning off its annuity business over to Brighthouse Life. On March 6, certain MetLife annuity and life products were rebranded as Brighthouse Financial products, including the Shield Level Selector annuities and the variable annuities with FlexChoice. The Shield 10 was the first new product to be born under the Brighthouse brand.
As its name suggests, the Shield 10 offers a 10% downside. (Other Shield contracts offer different levels of protection.) There are three available indexes: the S&P 500, the Russell 2000 Small Cap, and the MSCI EAFE Index, which offers exposure to equities in Europe, Australasia and the Far East.
While Allianz Life’s Index Advantage offers only one-year crediting methods, Shield 10 nominally offers three term lengths (1, 3 and 6 years). (The calculator on the Shield 10 web page allows only the one-year term option and the website lists only one-year rates, however). The minimum investment is $25,000. The six-year surrender period has a first-year charge of 7%.
Step Rate. Shield 10’s “Step Rate” option corresponds to the Index Advantage’s Precision option. If the index is flat or positive over a contract year, the Shield 10 pays 7.5% (on the S&P 500 Index), 7.9% (on the MSCI EAFE Index) or 9.4% (on the Russell 2000 Index). Brighthouse absorbs the first 10 percentage points of loss.
Maximum Growth Opportunity. This option corresponds to the Index Advantage’s Performance option. As with the Step Rate option, Brighthouse absorbs the first 10 percentage points of loss. But the caps are higher here: 10% (on the S&P 500 Index), 10.5% (on the MSCI EAFE Index) or 12.5% (on the Russell 2000 Index).
Brighthouse Financial has chosen Wells Fargo to distribute this product, despite Wells Fargo’s well-publicized problems, with the abrupt resignation of its CEO amid a mis-selling scandal and significant federal fines in recent years. When questioned about the choice of distributor, a Brighthouse spokesman said, “Wells Fargo Advisors is a key distributor for several Brighthouse Financial products and we are excited to be working with them to bring to market Shield Level 10.”
Criticism of IVAs
Outside observers at the SEC and at one consulting firm have in the past been skeptical of IVAs. The SEC has publicly questioned the logic of saddling the client with the extreme end of the downside risk. A consulting firm, writing in 2013, determined that it would be difficult for an advisor or investor to assess the comparative value of various IVA options.
“This class of variable annuity is a markedly different type of investment than traditional variable annuities, and requires a much more sophisticated analysis of the product parameters, especially the tradeoff between capped upside potential and buffered downside losses,” wrote analysts at the Securities Litigation Consulting Group in Washington, DC, four years ago.
“To many investors, the term annuity suggests stability, low risk, and guaranteed income. While spVAs [structured variable annuities] still bear this title, their crediting formulas are highly complex and the resulting account accumulation may be very different than what investors expect.
“Due to this complexity, it will like prove difficult for investors to compare spVAs to each other or to traditional variable annuities, which allow an investor to select the degree of equity exposure desired, rather than allowing the risk and return of his or her investment to be determined by the issuer of the product.”
Even an advisor familiar with annuities might find choosing among the many options as difficult (and ultimately as arbitrary) as choosing where to place chips on a craps table. An advisor who is accustomed to dealing with market risk primarily through asset allocation and Modern Portfolio Theory might not feel comfortable with IVAs or indexed products generally
On the one hand, index-linked insurance products offer solutions for paralyzed clients—perhaps for those who feel baffled by a market where both bond and stock prices are at all-time highs. On the other hand, the multitude of options in structured variable products can itself be paralyzing. If annuities are a puzzle, indexed annuities are a puzzle within a puzzle and IVAs even more so.
© 2017 RIJ Publishing LLC. All rights reserved.
A New Book from PIMCO’s Stacy Schaus
As soon as the FedEx driver delivered my review copy of “Successful Defined Contribution Investment Design” (Wiley, 2017) by Stacy Schaus and Ying Gao, I turned to the chapter on retirement income options for plan sponsors and retirees. This epigraph greeted me:
“I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left” — Voltaire.
Touché. Disarmed by the great man’s morda
nt wit, I dove into Chapter 10, ready to discover what Schaus (right) and Gao, both of PIMCO, were telling plan sponsors about helping participants navigate the transition from accumulation to income at retirement.
If you don’t know Stacy Schaus, you must be new around here. She’s an executive vice president at PIMCO and head of the big bond firm’s defined contribution practice. She’s the ambassador of PIMCO’s DC business and the voice of its thought leadership in that area. A very frequent flier, Schaus is ubiquitous at the more cerebral industry conferences (and usually one of the few attendees to raise a hand during Q&A).
Her new book is a sequel to “Designing Successful Target-Date Strategies for Defined Contribution Plans” (Wiley, 2010), which focused on the creation of custom target-date funds. PIMCO issues a proprietary line of TDFs, called RealPath, but the firm is better known as a supplier of actively managed bond funds to DC plans.
“We are very active in defined contribution,” Schaus told RIJ recently. “We’re the largest manager of active income strategies in DC plans, including being part of TDFs.”
So where does PIMCO stand on income generation. Interestingly, about eight years ago, PIMCO introduced a 10-year retirement income-generating bond fund composed of Treasury Inflation-Protected Securities. PIMCO even tested the idea of combining the funds with a MetLife longevity annuity for a two-stage flooring solution.
That was a retail product, however, and in their book, whose content is largely based on surveys of and interviews with plan sponsors and consultants, Schaus and Gao deal mainly with issues around DC plan design and investment options. But the book also includes recommendations about income:
The PRICE method. This acronym stands for PIMCO Retirement Income Cost Estimate. Schaus recommends that DC plan sponsors use this number as a benchmark to help participants determine how much they have to save to achieve a desired retirement income. PRICE is equal to the discounted present value of a 20-year annual real income stream using the historical U.S. TIPS yield curve. “PRICE is a proxy for the cost of retirement income,” Schaus told RIJ.
‘Objective-aligned’ glidepaths. When choosing a target-date fund glidepath—that’s the rate at which a participant’s TDF fund allocation shifts from stocks to bonds over the course of their working years—Schaus recommends that plan sponsors use what she calls an “objective-aligned” glidepath.
Using such a glidepath, a TDF would contain more TIPS than most TDF designs typically do, the book says. The use of TIPS, not coincidentally, aligns the glidepath design with the PRICE savings objective. “The objective-aligned glidepath means that you’re looking at what it cost to retire, and what it takes to keep pace with it. That’s where we use the PRICE,” she said in an interview.
In practice, this might mean that a participant might invest in a TDF that corresponds to their risk tolerance and tailor their contributions to their savings goals rather than default to the TDF that matches their assumed retirement date and to a standard salary deferral.
‘In-plan’ rather than ‘out of plan’ annuities. Assuming that a plan sponsor wants to make an annuity option available to participants who want to convert part of their tax-deferred savings to income at retirement, Schaus and Gao favor directing participants to an “institutionally-priced” income annuity after they leave the plan. Taking their cue from surveys of plan sponsors, they don’t recommend including an income option (either a deferred income annuity or a lifetime withdrawal benefit) in the plan itself.
“In our surveys, consultants have raised questions about portability of the benefit, and about client communications,” Schaus told RIJ. “We’re supportive of buying annuities outside the plan, on platforms where you have competitive bidding. Retirees can consider going to an institutionally priced platform like Hueler’s Income Solutions or Fidelity.”
Actively managed bond funds rather than indexed funds. Schaus’ company is an active bond manager, which means that its fund managers try to outperform the bond indexes by, for instance, making bets on the economy, the direction of interest rates, and the credit environment. More than four in five plan sponsors offer active bond funds (versus 40% offering index funds), according to the book. Not surprisingly, she and Gao recommend this strategy during the accumulation and income stages of a TDF.
I asked Schaus if she still recommends custom TDF to plan sponsors. In a custom TDF, a plan advisor might create a custom asset allocation and glidepath out of a plan’s existing investment options.
“In our consultants survey, we asked about custom,” Schaus said. “It continues to grow. Plans above $1 billion will find that approach most attractive. On those plans, consultants recommend using them to establish control over the glidepath, hiring best-in-class managers, and leveraging the investment options are already on their core lineups.”
Although the new book can serve as a guide to plan sponsors, Schaus told RIJ that PIMCO itself isn’t in the plan design business. “Sponsors ask us if they should redesign their plan, and how can we can help them do that. But PIMCO isn’t hired to design plans,” she said. “The book is a comprehensive guide to help sponsors go through the design process. The plan designer would be a consultant, working with the plan sponsor.”
Schaus said that the book should be seen as her words and the words of the plan sponsors and consultants she has surveyed, and not necessarily PIMCO’s positions. “The book is based on 10 years of discussion and research on global plans, governance, default and core lineups,” she said. “It brings it all together, and addresses the questions we often hear from sponsors.”
© 2017 RIJ Publishing LLC. All rights reserved.
Vermont offers state-wide voluntary MEP
Vermont’s legislature has approved S135, an economic development omnibus bill that provides for the creation of the “Green Mountain Secure Retirement” plan, a voluntary group 401(k) plan, or multi-employer plan (MEP) for small businesses in the state.
Pending due diligence by the Treasurer’s office, the goal is to implement the retirement plan by January 15, 2019.
Vermont’s state-sponsored MEP “will be open to any employer with fewer than 50 employees that does not currently provide a retirement plan to its employees. This program makes a secure, vetted retirement option available to Vermont’s small employers,” said a release from the state treasurer’s office.
A seven-member board, with broad representation of interested parties, will be responsible for choosing “investments, managers, custodians, and other support services” for the MEP during the next 18 months.
By restricting the state-sponsored MEP to employers with fewer than 50 employees, the law ensures that the plan won’t represent competition for major 401(k) plan providers, who typically focus their sales efforts on larger firms.
Multi-employer plans are one of three types of publicly-sponsored retirement savings initiatives that have been explored by various U.S. states as they try to solve a stubborn problem: the fact that many small businesses do not provide tax-favored retirement plan where employees can make automatic payroll contributions. More than 100,000 workers in Vermont, 45% of working Vermonters, don’t currently have access to such a plan.
Participation in a state-sponsored MEP is up to the employer to decide—just as creation of a 401(k) or SIMPLE IRA is up to the employer. The MEP lowers the hurdles to plan creation by small businesses by assuming most of the administrative chores associated with setting up and maintaining even a small 401(k) plan. Once the employer chooses to join the MEP, all employees would be automatically enrolled into the plan but could opt out if they chose.
Some believe that only a mandatory auto-enrolled defined contribution, like the U.K.’s NEST plan, would significantly increase the availability of workplace savings plans. Only about half of U.S. workers have access to retirement plans at work at any given time.
“After 40 years of the failed 401(k)—and after four years of states championing individual retirement accounts—Vermont devises voluntary multiple employer plans,” said Teresa Ghilarducci, director of the Schwartz Center for Economic Policy Analysis at the New School for Social Research in New York. “Focusing on employers is good; voluntary is insufficient. Been there, done that. We need a mandatory saving supplement to Social Security.”
Several states, including large, Democratic-majority states like California, New York and Illinois, have pursued so-called Secure Choice plans that would require most employers who don’t offer any other workplace plan to arrange for their employees to be auto-enrolled into Roth IRAs and to make regular contributions (up to the annual IRA limit).
But many retirement industry trade groups, including the American Council of Life Insurers, the Insured Retirement Institute, and the National Association of Insurance and Financial Advisors, have opposed such mandatory plans. They fear that many small employers might take the path of least resistance and default into such plans, and thereby become a lost market for the 401(k) plans that are sold by those organizations’ members.
Green Mountain Secure Retirement bill
S135 provided that the MEP plan will be available on a voluntary basis to employers with 50 employees or fewer; and that do not currently offer a retirement plan to their employees; and self-employed individuals. According to the law:
- The plan will automatically enroll all employees of employers that choose to participate in the MEP; allow employees the option of withdrawing their enrollment and ending their participation in the MEP; be funded by employee contributions with an option for future voluntary employer contributions; and be overseen by a board that shall set program terms; prepare and design plan documents; and be authorized to appoint an administrator to assist in the selection of investments, managers, custodians, and other support services; and that shall be composed of seven members.
- The board members will include an individual with investment experience, to be appointed by the Governor; an individual with private sector retirement plan experience, to be appointed by the Governor; an individual with investment experience, to be appointed by the State Treasurer; an employee or retiree, to be appointed by the State Treasurer; an employee advocate or consumer advocate, to be appointed by the Speaker of the House; an individual who is an employer with 50 employees or fewer and who does not offer a retirement plan to his or her employees, to be appointed by the Committee on Committees; and the State Treasurer, who shall serve as chair.
- By January 15, 2020 and every year thereafter, report to the House and Senate Committees on Government Operations concerning the Green Mountain Secure Retirement Plan, including the number of employers and self-employed individuals participating in the plan; the total number of individuals participating in the plan; the number of employers and self-employed individuals who are eligible to participate in the plan but who do not participate; the number of employers and self-employed individuals, and the number of employees of participating employers who have ended their participation during the preceding 12 months; the total amount of funds contributed to the Plan during the preceding 12 months; the total amount of funds withdrawn from the Plan during the preceding 12 months; the total funds or assets under management by the Plan; the average return during the preceding 12 months; the costs of administering the Plan; the Board’s assessment concerning whether the Plan is sustainable and viable.
- Once the marketplace is established, the reports must include the number of individuals participating; the number and nature of plans offered; and the Board’s process and criteria for vetting plans; and any other information the Board considers relevant, or that the Committee requests.
© 2017 RIJ Publishing LLC. All rights reserved.
