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Honorable Mention

Posted on June 8, 2017 by Editorial Staff -

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 Instituteis 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.”

Assets under Management of 15 Publicly Traded U.S. Asset Managers in DST kasina survey

Posted on June 1, 2017 by Editorial Staff -

Complex Annuities for a Complex Era

Posted on June 1, 2017 by Kerry Pechter -

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.

A New Book from PIMCO’s Stacy Schaus

Posted on June 1, 2017 by Kerry Pechter -

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 mordant 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.”

Vermont offers state-wide voluntary MEP

Posted on June 1, 2017 by Kerry Pechter -

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.

Life/health insurers see net quarterly operating income more the double

Posted on June 1, 2017 by Editorial Staff -

The U.S. life/health industry’s pretax net operating income in first-quarter 2017 jumped 130% over the same period a year ago, to $14.5 billion from $6.3 billion. It was the highest first-quarter total since 2013, according to a new Best’s Special Report, “A.M. Best First Look—1Qtr 2017 U.S. Life/Health Financial Results.”

The data is derived from companies’ three-month 2017 interim statutory statements (received by May 22, 2017), representing about 84% of total industry premiums and annuity considerations.

The life/health industry posted an increase in realized capital losses of $3.1 billion compared with first-quarter 2016. The loss increase, driven by a $1.8 billion year-over-year difference at Transamerica Life Insurance Company, reduced net income growth to $7.7 billion, a 73.5% increase over first-quarter 2016.

Total income in first-quarter 2017 increased year-over-year by 1.6% to $187.2 billion as premiums and annuity considerations grew 2.2% and net investment income rose 6.2%. This offset a 38.1% decline in commissions and expense allowances on reinsurance ceded, which was elevated during first-quarter 2016 with a reinsurance agreement at Genworth Life and Annuity Insurance Co. that resulted in $2.3 billion of income not repeated during the current quarter.

The life/health industry saw continued growth in invested assets, reaching a record $3.8 trillion as of March 2017. Bonds remained the top invested asset class in first-quarter 2017, but the proportion held in bonds continued to steadily decline as more money was invested in mortgage loans, which made up more than 11% of invested assets at the end of the first quarter.

Lincoln Financial’s new VA income rider offers rich benefits—with a catch

Posted on June 1, 2017 by Editorial Staff -

Lincoln Financial Group has launched a new variable annuity living benefit that offers investors a six percent annual increase in the income base that stacks on top of prior account value lock-ins, and a maximum equity allocation of as much as 80%, Lincoln Financial announced this week.

The name of the new rider is Lincoln Max 6 SelectAdvantage. It is available on Lincoln Financial variable annuities for an additional cost. The rider offers an initial income withdrawal rate of 6% at age 65 for single life (5.5% for joint life). If the account value goes to zero, however, the lifetime income amount will drop to three percent of the benefit base.

There are 51 investment subaccounts, 25 asset allocation options and five asset allocation models. Within certain restrictions, the equity allocation can be as high as 80%.

The annual rider fee is 1.25% above standard contract expenses, or 1.50% for joint life (to a maximum annual charge is 2.25% single life or 2.45% joint life). Investment requirements apply. As the Income Base increases, the cost will increase proportionately.

Aspen Institute and LendUp sponsor events on ‘income volatility’

Posted on June 1, 2017 by Editorial Staff -

The Aspen Institute Financial Security Program and LendUp, a “socially responsible lender for the emerging middle class,” announced this week that they will sponsor Finance Forward, a multi-city event series where elected officials, businesses, community advocates and nonprofit leaders will discuss solutions to the problem of income volatility in the U.S.

Columbia, SC, will host the first event on June 1, 2017 at the South Carolina Bar Conference Center. There will be an invitation-only roundtable at the University of South Carolina with Mayor Steve Benjamin, Pew Charitable Trusts, Cities for Financial Empowerment Fund, The Urban Institute, The Cooperative Ministry, the Columbia Office of Community Development and the USC Alumni Center.

Oakland, CA will host the last event in the series later this year, after possible events in Louisiana, Missouri, New Mexico and other states.

“Income volatility is now a primary driver of financial instability for American workers,” according to the Aspen Institute Financial Security Program. “Income volatility results in… an inability to make long-term plans, stress and health issues, negative impacts on child development and reliance on unsafe financial products,” the group said in a release.

For big asset managers, average margins are down but AUM is up: DST

Posted on June 1, 2017 by Editorial Staff -

Three crosswinds—the “Trump Bump” in the markets, fee compression and higher expenses—left some of the largest publicly traded U.S. asset managers with mixed results in the first quarter of 2017.

Operating margins for the 15 asset managers in the DST kasina Asset Manager Composite was 32.0% in the first quarter, down 200 basis points from the previous quarter, DST kasina reported this week.

The decline followed three consecutive quarters of improvement in operating margins, The overall margin was still within the historical range of 30% to 34% for the firms, however.

Cumulative assets under management (AUM) for those 15 firms grew 3.8% quarter-over-quarter, and 4.8% year-over-year to an all-time high of nearly $11 trillion ($10.999 trillion). Most of the AUM increase was attributable to market appreciation (91%).

“Strong sequential growth in composite assets only led to modest sequential growth in asset management fee revenues, implying increased signs of fee pressure,” said Erach Desai, Senior Research Analyst with DST kasina, in a statement.

“With expenses already having been tightly managed for the past three quarters, the sequential rise in expenses pressured operating margins down in the first quarter.”

BlackRock, Franklin Templeton, Invesco, Legg Mason, T. Rowe Price, Affiliated Managers Group, Alliance Bernstein (AB), Federated Investors, SEI, Janus Capital Group, Waddell & Reed, Artisan Partners, Cohen & Steers, GAMCO Investors, Pzena Investment Management are the 15 firms in the survey.

In other highlights from the survey:

Twelve of the 15 asset managers experienced a quarter-over-quarter decline in operating margin, compared to only nine of the 15 firms from the third to fourth quarter of 2016.
BlackRock’s operating margin declined by 177 basis points. Excluding Blackrock, the composite group still declined by 200 basis points.
Revenues from asset-generated fees in Q1 2017 were $8.4 billion, up 0.7% from the prior quarter. BlackRock’s asset-generated fees in the first quarter improved by 0.3%.
The S&P 500 index rose 6.1% in the quarter. Despite the anticipated 0.25% rate increase by the Federal Reserve, the bond market gained 0.8% (based on the Bloomberg Barclays U.S. Aggregate Index).
Only two of the 15 asset management firms saw their overall AUM decline.
1Q2017 the sixth consecutive quarter of positive appreciation and flows for the overall Composite group.
1Q2017 was the seventh consecutive quarter of net outflows for 13 of the asset management firms, excluding BlackRock and SEI. SEI doesn’t report new net flows.

Indexed Annuity Sales by Issuer (First Quarter 2017)

Posted on May 25, 2017 by Editorial Staff -

Fiduciary Rule Hurts First Quarter Annuity Sales

Posted on May 25, 2017 by Kerry Pechter -

Year-over-year U.S. annuity sales were depressed in the first quarter of 2017 by uncertainty over the Obama Department of Labor’s fiduciary rule, which President Trump’s Secretary of Labor, Alexander Acosta, said will be allowed to take effect on June 9 despite the objections of annuity industry trade groups and lobbyists.

Overall U.S. annuity sales were $52.0 billion in the first quarter. That was a slight rise from the fourth quarter of 2016 but a 12% percent decline from the first quarter of 2016, according to LIMRA Secure Retirement Institute’s First Quarter 2017 U.S. Retail Annuity Sales Survey. 1Q2107 witnessed the fourth consecutive quarter of declines in overall annuity sales.

“Despite an improvement in the equities market and interest rate environment, uncertainty around the DOL rule overwhelmed any impact it may have had on annuity sales,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute, in a release.

Total first quarter indexed annuity sales were just over $12.9 billion. Sales were down almost 3% from the previous quarter, and down over 14.3% from the same period last year, according to Wink. (According to LIMRA, “Indexed annuity sales fell 13% percent to $13.6 billion. Much of this decline can be attributed to a drop in sales by the top two carriers.”)

“The Department of Labor’s fiduciary rule is imminent, and taking a toll on indexed annuity sales,” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc., in a release. “Insurance distributors have been so busy preparing for the rule that they haven’t been able to focus on marketing products. Sales show it.”

In the first quarter, variable annuity (VA) sales totaled $24.4 billion, down 8% year-over-year. VAs have seen only one quarter of sales growth when compared to prior years since 2012.

“While we believe the DOL is playing a significant role in the declining VA sales, this downward sales trend began before the DOL announced their rule,” said Giesing. “Sales with a guaranteed living benefit (GLB) continued to decline at a much faster rate than products without. In fact, where we are seeing growth is in the structured VA market. In the first quarter, structured settlements grew 60% compared to first quarter 2016. This segment represents about five to 10 percent of the total VA market.” (See LIMRA first quarter 2017 annuity sales chart below.)

The Institute is forecasting a 10% to 15% drop in VA sales in 2017, to a total of less than $100 billion, which hasn’t happened since 1998. In the first quarter, sales of fixed annuities fell 15%, totaling $27.6 billion. All fixed product lines sales experienced declines.

“Despite the decline in first quarter fixed annuity sales, this is the fifth consecutive quarter fixed sales outperformed variable sales,” said Giesing. “The last time this happened was nearly 25 years ago.”

In an op-ed piece in the Wall Street Journal on May 23, Labor Secretary Alex Acosta announced that the fiduciary rule would take partial effect on June 9, as the Obama administration intended. Indexed annuity distributors, as represented by the National Association of Fixed Annuities, expressed their disappointment in a release the following day.

Acosta said he would, nonetheless, ask for public comment with the possible intent of revising the rule in the future. It wasn’t clear when he intends to hold new hearings or open new comment periods immediately, or if he might try to reverse the rule before January 1, 2018, when, barring reversal, the rule will go into full effect.

The delay will keep some parts of the annuity industry unsure how to proceed. Some brokerages and 401(k) recordkeepers have already changed their procedures, pricing, training and other business policies to conform to the rule. Tens of millions of dollars have already been spent on such changes.

Seven of the top 10 indexed annuity writers reported declines in the first quarter, according to LIMRA. Sales of indexed annuities with GLBs dropped off significantly in the first quarter, to the point where more indexed annuity sales were without a GLB than with one.

“While we typically see a seasonal decline in the first quarter, we suspect there are some companies re-evaluating their product mix in anticipation of the DOL rule,” added Giesing. “Unless there is a change in the DOL fiduciary rule rollout, we are anticipating indexed sales in 2017 to decline for the first time in a decade.”

The Institute is forecasting indexed annuity sales will drop 5% to 10% in 2017 and another 15% to 20% in 2018 when the DOL’s so-called BICE (Best Interest Contract Exemption) goes into effect. The BICE requires brokerages to pledge that advisors who sell indexed or variable annuities on commission will act solely in their clients’ best interests, and to be legally liable for violations of that pledge.

Sales of fixed-rate deferred annuities, (Book Value and MVA) fell 16% in the first quarter to $10.1 billion. Excluding 2016, first quarter 2017 results were better than sales in the first quarter of each year since 2009.

First quarter 2016 was an atypical quarter. A large block of business came to term with a sizable amount reinvested in the new fixed annuity products, LIMRA said. The Institute forecasts fixed-rate deferred products to grow as much as 5% in 2017, and by as much as 15% to 20% in 2018.

Income annuities had a tough quarter despite steady interest rates, as the flexibility features in deferred annuities trumped the higher payouts typically seen in income annuities. First quarter single premium immediate annuity (SPIA) sales were $2.0 billion, down 20% when compared to the same quarter last year. Deferred income annuity (DIA) sales were down 26% in the first quarter, to $545 million.

The Institute projects income annuity sales to drop 5% to 10% in 2017, but then rebound by 10% to 15% in 2018. The Institute expects overall annuity sales in 2017 to fall below $200 billion, about a 5% to 10% decline, which will be the lowest sales level since 2001.

Deregulators Must Follow the Law, So Regulators Will Too

Posted on May 25, 2017 by Alexander Acosta -

President Trump has committed—and rightly so—to roll back unnecessary regulations that eliminate jobs, inhibit job creation, or impose costs that exceed their benefits. American workers and families deserve good, safe jobs, and unnecessary impediments to job creation are a disservice to all working Americans. As the Labor Department approaches this regulatory rollback, we will keep in mind two core principles: Respect for the individual and respect for the rule of law.

America was founded on the belief that people should be trusted to govern themselves. Citizens sit on juries and decide the fate of their fellow citizens. Voters elect their representatives to Washington. By the same token, Americans should be trusted to exercise individual choice and freedom of contract. At a practical level, this means Washington should regulate only when necessary. Limiting the scope of government protects space for people to make their own judgments about what is best for their families.

The rule of law is America’s other great contribution to the modern world. Engraved above the doors of the Supreme Court are the words “Equal Justice Under Law.” Those four words announce that no one is above the law, that everyone is entitled to its protections, and that Washington must, first and foremost, follow its own rules. This means federal agencies can act only as the law allows: The law sets limits on their power and establishes procedures they must follow when they regulate—or deregulate.

The Administrative Procedure Act is one of these laws. Congress had good reason to adopt it: In the modern world, regulations are akin in power to statutes, but agency heads are not elected. Thus, before an agency can regulate or deregulate, it must generally provide notice and seek public comment. The process ensures that all Americans—workers, small businesses, corporations, communities—have an opportunity to express their concerns before a rule is written or changed. Agency heads have a legal duty to consider all the views expressed before adopting a final rule.

Today there are several regulations enacted by the Obama administration that federal courts have declared unlawful. One is the Persuader Rule, which would make it harder for businesses to obtain legal advice. Even the American Bar Association believes the rule goes too far. Last year a federal judge held that “the rule is defective to its core” and blocked its implementation. Now the Labor Department will engage in a new rule-making process, proposing to rescind the rule.

Another example of a controversial regulation is the Fiduciary Rule. Although courts have upheld this rule as consistent with Congress’s delegated authority, the Fiduciary Rule as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them.

The rule’s critics say it would limit choice of investment advice, limit freedom of contract, and enforce these limits through new legal remedies that would likely be a boon to trial attorneys at the expense of investors. Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.

The Labor Department has concluded that it is necessary to seek additional public input on the entire Fiduciary Rule, and we will do so. We recognize that the rule goes into partial effect on June 9, with full implementation on Jan. 1, 2018. Some have called for a complete delay of the rule.

We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed. Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.

Under the Obama administration, the Securities and Exchange Commission declined to move forward in rulemaking. Yet the SEC has critical expertise in this area. I hope in this administration the SEC will be a full participant.

America is unique because, for more than 200 years, its institutions and principles have preserved the people’s freedoms. From administration to administration, respect for the rule of law has remained, even when Americans have been bitterly divided. Some who call for immediate action on the Obama administration’s regulations are frustrated with the slow process of public notice and comment. But this process is not red tape. It is what ensures that agency heads do not act on whims, but rather only after considering the views of all Americans. Admittedly, this means deregulation must find its way through the thicket of law. Casting aside the thicket, however, would leave Americans vulnerable to regulatory whim.

The Labor Department will roll back regulations that harm American workers and families. We will do so while respecting the principles and institutions that make America strong.

Alexander Acosta is the Secretary of Labor.

Do Rollover IRAs Contain Pension Money?

Posted on May 25, 2017 by Kerry Pechter -

The new Labor Secretary disappointed the indexed and variable annuity distribution industry this week when he announced in a Wall Street Journal op-ed piece that he wouldn’t try to prevent the Obama administration’s fiduciary rule from reaching its partial-applicability date of June 9, 2017, intact and on time.

Secretary Alexander Acosta wrote: “We have carefully considered the record in this case, and the requirements of the Administrative Procedure Act, and have found no principled legal basis to change the June 9 date while we seek public input. Respect for the rule of law leads us to the conclusion that this date cannot be postponed.”

That gives the cement around the fiduciary rule more time to harden and, presumably, will make it harder for the financial services lobby to dislodge the rule in coming months. Anybody who’s still betting that the rule will be reversed may now feel as queasy as a short-seller in a rising market.

On the other hand, Acosta appeared to encourage the rule’s opponents by saying that he would seek new public input on it. “Trust in Americans’ ability to decide what is best for them and their families leads us to the conclusion that we should seek public comment on how to revise this rule.”

Why does he think we should open up this can of worms again? Because the rule “as written may not align with President Trump’s deregulatory goals. This administration presumes that Americans can be trusted to decide for themselves what is best for them,” he wrote.

Acosta continued: “The rule’s critics say it would limit choice of investment advice, limit freedom of contract, and enforce these limits through new legal remedies that would likely be a boon to trial attorneys at the expense of investors. Certainly, it is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions.”

So there’s still a chance that the Acosta will, if not reverse the fiduciary rule, then eliminate the financial industry’s most-hated elements: the right to file class action suits against brokerages that it gives investors, the requirement that commissioned agents and brokers act “solely” in a rollover IRA client’s best interests, and the requirement that commissioned indexed and variable annuity sellers use the Best Interest exemptions.

The Secretary doesn’t name those offending elements in his op-ed article. Instead, he raises all-purpose, evergreen pro-market objections that aren’t relevant to this debate. The question, for example, is not whether Americans can be trusted to decide what’s best for them. The question is whether Americans can trust the professionals whom they pay to help them make decisions about stuff they don’t understand.

Second, the argument that the fiduciary rule will “limit choice” is tired and meaningless: That’s what rules do. Third, investors aren’t worried about the costs of lawsuits against brokerages; brokerages are worried. I can respect the brokerage firms’ concerns about frivolous litigation based on the rule, but that’s not the Labor Secretary’s problem.

If it was unfair or unwise for the Obama DOL to have criminalized commissions and to have demonized indexed and variable annuities at the very moment when Boomers need income-producing products, then let’s debate those alleged injustices or mistakes openly and directly.

What the Secretary’s letter conspicuously lacks is any reference to rollover IRAs, and the fact that they are extensions of 401(k)s. He doesn’t mention this debate’s fundamental issue: The ambiguous regulatory status of rollover IRA accounts (which just happen to contain some $8 trillion that brokers and agents want unobstructed access to). Should we regard rollover IRAs as containers of pension assets (governed by the Labor Department) or as regular risk investments (governed by FINRA and the SEC)?

My view: If the financial services industry wants to argue that rollover IRA money isn’t pension money, and that its owners don’t need or require ERISA protections, then they should be ready to say that the sources of rollover IRAs—401(k) accounts—aren’t really pension money either, and that their owners don’t deserve or require ERISA protections.

To regulate the two of them differently—while leaving them both tax-deferred—makes no sense. As I understand it, federal courts have already affirmed the DOL’s right to regulate rollover IRAs. The Secretary will discover that when he examines these issues more closely.

Indexed annuity sales fall in first quarter: Wink

Posted on May 25, 2017 by Editorial Staff -

Total first quarter 2017 non-variable deferred annuity sales were $23.0 billion; up over 9.7% from the prior quarter, but down almost 15% from the same period in 2016, according to the latest edition of Wink’s Sales & Market Report.

The report covered 55 indexed annuity issuers, including 51 fixed annuity providers, and 56 multi-year-guaranteed annuity companies, according to a Wink release.

Total first quarter indexed annuity sales were just over $12.9 billion. Sales were down almost 3% from the previous quarter, and down over 14.3% from the same period last year. Total first quarter traditional fixed annuity sales were just over $1.1 billion. Sales were up more than 5.5% from the previous quarter, and down over 6.4% from the same period last year.

New York Life was the overall top seller of non-variable deferred annuities, with a market share of 9.6%. Allianz Life was second, followed by AIG, Great American, and Global Atlantic. Allianz Life’s Allianz 222 Annuity indexed annuity was the top-selling non-variable deferred annuity in the first quarter.

Allianz Life retained its top ranking in indexed annuity sales with a market share of 13.1%. American Equity was second, followed by Athene USA, Nationwide, and Great American Insurance Group. Allianz Life’s Allianz 222 Annuity was the top-selling indexed annuity, for all channels combined, for the eleventh consecutive quarter.

MYGA sales for the first quarter were over $8.9 billion; up more than 35.6% when compared to the previous quarter, and down nearly 16.7% when compared to the same period last year.

Jackson National Life was the top seller of traditional one-year guaranteed rate fixed annuities, with a market share of 13.2%, Wink said. Modern Woodmen of America attained the second-ranked position. Great American, Reliance Standard, and Global Atlantic Financial Group rounded out the top five carriers in the market, respectively. Forethought Life’s ForeCare fixed annuity was the top-selling one-year fixed annuity for the quarter, for all channels combined.

New York Life was the top carrier in MYGA sales, with a market share of 24.6%. AIG was in second place, followed by Global Atlantic Financial Group, Symetra Financial, and Security Benefit Life. Forethought’s SecureFore 3 Fixed Annuity was the top-selling MYGA for the quarter, for all channels combined.

“While an increase in sales of more than 35% may seem significant to the MYGA market, one has to consider the interest rate environment,” Moore said. “Most companies experienced annuity rate increases during the first quarter, as a result of the Federal Reserve’s two increases in the benchmark rate during the same period. This directly benefitted MYGA sales.”

Moore said that Wink will begin reporting on immediate annuity and variable annuity product sales in the future. Wink’s Sales & Market Report expanded its sales reporting to include traditional universal life and whole life product sales, in addition to indexed universal life, in the first quarter of 2017. Term life product sales will follow in upcoming quarters.

ETFs and alternatives offer hope amid soft variable annuity sales

Posted on May 25, 2017 by Editorial Staff -

Variable annuity (VA) sales continue to slow, reducing flows into the VA subaccounts managed or sub-advised by asset managers, according to the May 2017 issue of The Cerulli Edge – U.S Monthly Product Trends Edition.

ETFs offer a thin silver lining to that cloud, however. Insurers believe that the inclusion of ETFs as subaccount options in VAs will bring in assets. ETFs, which are passively managed, are attractive because of their generally lower cost and their ability to match up with insurer hedges, the report said.

Overall, ETF assets surpassed $2.8 trillion in April, after a robust 2.3% monthly growth. Net flows were $34.9 billion, equating to organic growth of 1.3%.

Despite the negative effect of the DOL fiduciary rule on VA sales to rollover IRA clients, “VAs will still represent an area of opportunity for liquid alternative asset managers,” Cerulli said. “Firms looking to get into the business should consider the opportunity for VITs over sub-advised arrangements, despite the overall industry’s migration to unaffiliated sub-advisors. Additionally, alternative managers should specifically consider IOVA (investment-only variable annuity) opportunities.”

The net flow into mutual funds was a collective $10.1 billion in April. The YTD total for the first four months of 2017 was $102.9 billion. Taxable bond funds received the most net flows, grabbing $15.9 billion in April.

High-profile dealmakers acquire Fidelity & Guaranty Life

Posted on May 25, 2017 by Editorial Staff -

The directors of CF Corporation and Fidelity & Guaranty Life, a provider of fixed indexed annuities and life insurance in the U.S., have approved a merger agreement under which CF Corp. will acquire FGL for $31.10 per share in cash, or about $1.835 billion, and assume $405 million of FGL’s existing debt.

The price implies a value of 1.1 times adjusted book value as of March 31, 2017. The investor group includes billionaire dealmaker Chinh E. Chu and William P. Foley II of CF Corp, Blackstone funds (where Chu spent 25 years) and Fidelity National Financial (where Foley is chairman). Blackstone and Fidelity National will fund the transaction with about $900 million in common and preferred equity.

FGL has about $28 billion of GAAP total assets and about $1.6 billion of adjusted book value and FGL’s sales have grown by about 10% annually from 2012 to 2016, according to a release this week.

Chris Littlefield will continue to lead FGL as president and CEO. FGL will remain headquartered in Des Moines, Iowa, and will continue operations from Baltimore, Maryland, and Lincoln, Nebraska. Messrs. Chu and Foley will serve as executive chairmen of the board.

The transaction will be financed with $1.2 billion from CF Corp.’s IPO and forward purchase agreements, and more than $700 million in additional new common and preferred equity. Funds advised by Blackstone Tactical Opportunities, funds advised by GSO Capital Partners LP (the credit division of Blackstone) and FNF have provided “a full backstop funding commitment to ensure certainty of funding,” the release said.

FGL will enter into an investment management agreement with affiliates of Blackstone. Chu and Foley will offer input to the asset management function led by Blackstone.

In connection with the transaction, CF Corp. will acquire certain reinsurance companies from HRG Group, Inc., FGL’s largest shareholder. HRG was formerly Harbinger Group, Inc.

The transaction is expected to close in the fourth quarter of 2017, subject to the approval of the shareholders of CF Corp. and FGL, and receipt of required regulatory approvals and other customary closing conditions. Certain investors that own approximately 18% of CF Corp.’s common shares have entered into voting agreements to support the transaction.

Danes reject six-month increase in retirement age

Posted on May 25, 2017 by Editorial Staff -

Admitting a lack of broad political support for the move, prime minister Lars Løkke Rasmussen of Denmark has abandoned his plan to increase the state pension age by six months to age 67.5, IPE.com reported.

As the law stands, people born between 1956 and 1962 are entitled to receive a state pension at the age of 67. Under the plan that has now been dropped, this age would have increased by six months to 67.5 years.

Løkke Rasmussen has proposed the increase in the state pension age several times over the last 12 months, according to DR, but he has now said that the idea had been finally laid to rest.

However, he also said on television that the government would continue to work towards making it easier for people to stay in the labor market for longer if they wanted – an outcome the prime minister said was necessary if the country was to free up money for welfare.

“We are still going to come out with an initiative that will be about motivating Danes to stay a bit longer in the workforce,” Løkke Rasmussen said.

Resistance to the increase in the pension age came mainly from the two largest parties in the Danish Parliament, the Social Democrats and the Danish Peoples’ Party, according to national broadcaster DR.

“A broad majority… has already decided that the state pension age should rise gradually, if Danes are living longer,” said Løkke Rasmussen, who is leader of the Conservative Party (Venstre).

Because the Danish labor market needs more workers putting money into the pension system and fewer people taking money out, “it would be reasonable to adjust settlement to create greater equality between generations and ensure our progress and prosperity,” he said.

Bogoian to lead product development at Prudential Annuities

Posted on May 25, 2017 by Editorial Staff -

Dianne Bogoian has been named senior vice president and head of product for Prudential Annuities. She is responsible for product development and management, reporting to Lori Fouché, president of Prudential Annuities, and is a member of her senior leadership team. Prudential Annuities is a unit of Prudential Financial.

Bogoian began her career as an actuarial student for Aetna in 1993. She joins Prudential from Voya Financial (the former ING U.S.), where she was senior vice president of Retirement Products.

Bogoian attained a Fellowship designation with the Society of Actuaries in 2000 and is a member of the American Academy of Actuaries. She graduated magna cum laude from Fairfield University with a bachelor’s degree in mathematics. She is a FINRA Limited Principal.

Retirement Next Gen Ad

Posted on May 21, 2017 by Editorial Staff -

Retirement Next Gen Ad

What to Do About Low Returns

Posted on May 18, 2017 by Kerry Pechter -

A century ago, Robert Frost wondered if the world would end in fire or ice. Today, Americans with money wonder if their world might end in, say, a new technology boom or in a drawn-out period of secular stagnation, with low profits, low real yields and low returns.

“Saving and Retirement in an Uncertain Environment” was, fittingly, the theme of the Pension Research Council symposium at Penn’s Wharton School in Philadelphia this month. Its agenda: to “explore how the weak performance of capital markets predicted over the next several years will shape pension, savings and decumulation plans.”

It was a bad news, better news story. The bad news: With a rising dependency ratio (too many old people per worker), equities at historically high P/Es, and T-bonds with zero real yields, investment returns appear to have nowhere to go but down.

The better news from the PRC conference: Inflation will be low, Boomers will work longer, and unforeseeable breakthroughs in technology may, deus ex machina, offer new avenues of 1990s-like GDP growth.

There was a mix of industry and academic voices at the conference. Teams from PIMCO, Vanguard, AQR Capital Management, State Street Global Advisors, Allianz Asset Management all presented papers, along with economists from Boston College, Goethe University, George Mason University, the Brookings Institution, The American College and Wharton.

The situation: Low rates

In his presentation, Raimond Maurer of Goethe University in Frankfurt, Germany, where safe assets currently offer negative yields, assumed annual real returns of a 60/40 portfolio going forward at either zero percent or 2% interest rates.

Vanguard researchers were more optimistic, predicting 5.5% returns. “For the 10 years through 2026, we estimate that the median return for [a 60% allocation to global equities and 40% to global bonds] will be almost three percentage points lower” than the 8.5% annualized return of the prior 90 years, said David Wallick of Vanguard’s Investment Strategy Group.

Antti Ilmanen of AQR said, “In the 1900s, the average returns for a 60% stocks, 40% bonds portfolio was 5%. But that has fallen to 2% to 2.5% in recent year. It hasn’t just been bonds. The returns on stocks have been declining too. The low discount rates are making returns on all long investment low at the moment.”

The low-returns ship has already sailed, inferred Michael Finke of the American College. When average P/E ratios were as high in the past as they are today (over 25), average annual real equity returns over the next decade were only 50 basis points. He suggested 2% real returns for a balanced portfolio as a “realistic” expectation for the next decade.

For savers, the combination of lower returns and longer life expectancies means that retirement is going to cost much more than it used to. To people on the verge of retirement it means, as Finke put it, that $1 of guaranteed lifetime inflation-adjusted income (i.e., an annuity) now costs about twice today as much as it did, in real terms, in 1982, the year when the stock-and-bond boom started.

What to do about it?

A number of responses to the looming period of low average returns were suggested. On the one hand, people can accept low-returns and work longer, save more, and spend less. Or they can shoot for higher net returns by managing risk better or cutting costs. Or you can capture the benefits of longevity risk pooling, by using Social Security efficiently or buying a private annuity.

Alternatives. One solution is to not accept low returns fatalistically but to get people to invest smarter—perhaps by adding alternative assets in the target date funds in which millions of 401(k) plan participants invest by default. This was suggested by Antti Ilmanen, a principal at AQR Capital Management, the firm started by outspoken hedge fund billionaire Cliff Asness.

Ilmanen’s suggestion was to diversify TDFs with commodities, “benign” forms of leverage, more global equity and bond exposure, and long-short strategies. (These are AQR’s own practices.) If executed well, he said, these tactics and strategies can produce better long-term returns without greater risk than TDFs already carry.

Lower costs. A very different response was to raise returns by lowering costs. The efficient-market, do-it-yourself enthusiasts from Vanguard maintained that you have to take more risk to get better returns and that the only reliable way to increase returns in a low-return world is to reduce costs.

“Looking forward, you can try to maintain your same level of return with a lot more risk, or you can target the same level of risk and lower your expectation of income,” said Vanguard’s David Wallick, whose presentation was titled, “Getting More from Less: Three Levers for a Low-Return World.”

“Clients want this problem pushed out into the future. But not understanding the problem won’t solve it. That’s the problem with turning to active management and private alternatives—you’re just hoping that someone else will deal with the problem instead of you.”

Delaying Social Security. If your biggest fear is running out of money before you die, then, in a low-return world, you can reduce that risk by claiming Social Security benefits later, suggested Raimond Maurer of Goethe University, who presented a paper co-authored by colleagues Vanya Horneff and Olivia Mitchell, director of the Pension Research Council.

They suggested building a bridge to Social Security with other savings. In their research, they calculated that a middle-class person who retires at age 62 would be better off covering his costs out of personal savings for the next four years and claiming Social Security at age 66 than claiming Social Security at age 62 and preserving his personal powder dry.

The reason is that, thanks to longevity risk pooling, a person’s Social Security benefits will grow at a faster rate (between ages 62 to 70) than their personal bond portfolios will. In Maurer’s hypothetical example, a mass-affluent 62-year-old man would get $15,000 a year from Social Security immediately but $20,000 a year at age 66.

Assuming that the man would need $25,000 a year for expenses, Maurer calculated that if he delayed Social Security until age 66, spent $25,000 a year (out of his $200,000 in savings) until and spent $5,000 a year thereafter, his risk of running out of money at age 87 (average life expectancy) would drop from 100% to 7% (given a 2% real return on bonds).

Maurer noted that, in addition to working longer, a low-rate environment will discourage people from saving as much on a tax-deferred basis. “In a low interest rate environment, people save less, and save less in 401(k) plan. They will save less in tax-qualified plans and more outside tax-qualified plans. They will also finance their consumption in retirement by drawing down their 401(k) savings sooner and working longer,” Maurer said.

No one knows anything

Of course, no one knows what the future will bring. In terms of prognostication, economists have a poor track record. If Social Security benefits are cut and people have to save more privately for retirement, or if the stock market crashes and the equity premium surges to its full capacity again, or if a new and unforeseen technology creates a new range of investment opportunities, or if the U.S. embraces immigration to supplement the workforce, then most of today’s assumptions will go into the shredder.

If past performance predicts anything, it’s that the future brings irony, unintended consequences, weird feedback effects and resistance from vested interests. Solutions that serve the few may backfire if practiced by the many.

“Working longer may be the only effective aggregate solution,” said John Sabelhaus, an economist at the Federal Reserve. Richard Fullmer of T. Rowe Price said that, as a practical matter, changes in assumptions about future returns will trigger a lot of expense information technology updates at fund companies. Emily Kessler of the Society of Actuaries said that working longer is more often an option for the wealthy than for the under-saved middle-class.

William Gale, director of the Retirement Security Project at the Brookings Institution, observed that people generally choose to save a lot when high interest rates reward them for saving; it would be novel for people save even more because rates are low.

“Normally, we talk about how savings should respond positively to higher returns,” he said, echoing Maurer’s comments above. “Now the optimal response is to save more in response to lower returns. That’s assuming a very large saving inelasticity. We’ve departed from usual conversation.”

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