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Mortality Credits: Sweet and Sour

Posted on May 4, 2017 by Kerry Pechter -

The thrust of Michael Finke’s presentation on the value of income annuities in retirement was amiable in its delivery but fairly brutal in its logic. In a world where equity and bond gains are poised to deliver lousy returns and lots of people are going to live longer than they expect to, mortality credits—the alpha of annuities—are the only safe haven for retirees.

Finke, a professor who recently became the dean and chief academic officer of The American College of Financial Services after establishing his reputation as a retirement income authority at Texas Tech, was speaking at the 2017 Retirement Industry Conference, the event staged in Orlando last week by the LIMRA Secure Retirement Institute and the Society of Actuaries.

Finke (right) didn’t say much new about life annuities that he, Wade Pfau, Curtis Cloke or David Blanchett hadn’t already said or written. (Not that they all agree on every point.) But, in an hour-long overview of the investment and longevity landscape, he pleasantly asserted that life annuities—those ugly ducklings of the financial barnyard—should be a no brainer for many retirees or near-retirees.

“The only way to get closer to meeting your spending goals is through some sort of partial annuitization strategy,” he told the 400 of so attendees of the conference—which felt lightly attended. The lead sponsors were Cannex, hannover re, and S&P Indices. (Todd Giesing, assistant research director of the LIMRA Secure Retirement Institute, said however that attendance was on par with the same event last year.)

“If you annuitize 25% of your assets with a QLAC [Qualified Longevity Annuity Contract], you can cut your risk of running out of money in half,” he said. Lest anyone think that he was talking only about helping “constrained” retirees, he added that, because of its tax advantages, a QLAC would provide longevity insurance to a high net worth retiree without diminishing any planned legacy.

“The QLAC costs nothing in terms of legacy goals,” Finke said. The fact that they are not more popular is baffling to me.”

Without a prayer

To accept Finke’s argument that mortality credits—the dividend that comes from pooling your longevity risk with others and accepting the fact that other members of the pool might enjoy some of your savings after you die—you had to accept his premise: That stocks and bonds, at current prices, have almost no prayer of matching their past appreciation rates.

“If you look only at historical returns, you might believe that taking more investment risk in retirement is better,” he said. But with price/earnings ratios of stocks in the mid-20s and bonds at historically low rates (i.e., at historically high prices), it makes no sense to expect the risk premia of the past.

Pointing to one of his slides, Finke noted, “In the past, when the P/E ratio was around 20, stocks averaged a return of about 90 basis over the next decade on an inflation-adjusted basis. When the P/E was over 25, stocks average 50 basis points [of real return] per year. Stocks may continue to rise because people are willing to pay more for equities than in the past. But the equity premium is probably not going to persist into the future.”

As for bonds, Fed policy isn’t the primary cause of low yields, Finke said. Yields are low because demand from retirement savers has driven up the price of safe assets. The result is that, because of both increasing longevity and falling bond yields, the cost of buying $1 of safe lifetime income has doubled over the past 20 years.

If that’s true, it means that savings rates need to be twice as high. If in the past a savings rate of 7% a year over one’s lifetime was necessary to fund a secure retirement, it will take a savings rate of 14% today to fund the same level of retirement security with the same asset mix, he said. A higher saving rate during the working years implies less consumption or, in other words, a lower standard of living, all else being equal.

Out of the ivory tower

To those who might argue that retirees with a 30-year time horizon in retirement need risk exposure at least as an inflation hedge, Finke countered that most people become more risk-averse as they get older and that retirees care less about rates of return than about knowing exactly how much they will be able to spend.

The substance of Finke’s presentation contrasted with panel discussions and break-out sessions at the conference that involved the fate of the Department of Labor’s fiduciary rule, now under review by the Trump administration, and about the future of indexed annuity and variable annuity sales, which have been hurt by uncertainty over the rule’s impact on brokers and agents.

The rule, in its current form, makes it more complex for independent brokers and agents to sell equity-linked annuities on commission to rollover IRA clients. But the rule has little impact on the career agents at mutual insurance companies who sell the bulk of income annuities.

Given the fact that indexed and variable annuity sales are orders of magnitude greater than income annuity sales, Finke’s argument may have seemed somewhat academic to many of the executives from publicly-held insurance companies and from brokerages or insurance marketing organizations in the room.

On the other hand, if Finke’s assessment of future investment returns is correct, and if more advisors adopt a holistic, retirement income planning state-of-mind, then income annuities, with their grim but rewarding mortality credits, may finally be ready to descend from the ivory tower and onto the street.

In Target-Date Space, It’s Vanguard, Et Alia

Posted on April 27, 2017 by Kerry Pechter -

Consecrated by the 2006 Pension Protection Act as a “qualified default investment” that defined contribution plan sponsors could safely auto-enroll their new participants into, target-date funds (TDFs) subsequently flourished in the DC investment space like an invasive weed.

TDFs now account for about a quarter of DC assets. In fact, they are perhaps the most viable investment in the DC space, which has steadily lost overall assets to rollover IRAs. Dozens of asset managers that distribute through DC plans want to expand their sales in the TDF business, though only about 10% of this business can be considered up for grabs.

Based on Morningstar’s recent snapshot of the TDF market at the end of 2016, the field consists of a peloton of Vanguard, Fidelity, T. Rowe Price, American Funds, JPMorgan, TIAA and about 35 others. In starker terms, it’s Vanguard and everybody else.

Vanguard’s domination of TDF flows in recent years has paralleled its domination of overall mutual funds flows. Its net TDF flows for the year were $37 billion, raising its TDF asset level to more than $280 billion, or 8.2% of its total $3.4 trillion in mutual fund assets under management. In net flows, its nearest competitor was American Funds, with its actively managed lineup, which added $15.8 billion in TDF flows in 2016.

Of the top ten TDF providers, five had negative flows. Fidelity, the second-ranked provider, saw its TDF assets dip by about $2.8 billion, to $193 billion. Principal’s fell by $497 million, John Hancock’s by $239 million, and Wells Fargo Funds, whose parent has been mired in scandal, lost $6.6 billion in TDF assets.

The combined value of target-date mutual funds is now $880 billion, according to a recent Morningstar report, up from less than $200 billion in 2008. If you count the value of target-date collective investment trusts (CITs), as benefits consultant Mercer does, the total value of TDF rises to $1.29 trillion.

‘You have to grow here’

As concentrated as the TDF business has become—the top 10 providers control more than 90% of the assets—the category is too huge and its flows too reliable (thanks to its unique status as the most popular default investment for auto-enrolled participants) for institutional fund providers to ignore.

“The target date fund area has a strong cash flow and overall growth,” said Neil Lloyd, author of Mercer’s new TDF study. “The DC market in general has had negative cash flow overall. So if you’re going to grow in the DC space, you have to grow here.”

For firms that want to grow their share of the TDF market, the challenge is to be the same as the leaders (in terms of offering a TDF option based on low-cost index funds or exchange traded funds) while trying to differentiate your offering with a different glidepath or asset allocation or transition-to-income option.

“At this stage, you have to do something different to catch anyone’s attention,” said Jeff Holt, associate director of Morningstar Manager Research. “You can’t just copycat someone else. It’s hard going but there’s a reluctance to give up on it and a lot of incentive to try to figure out something that will make it work.”

American Funds has succeeded in creating its own niche in the TDF area, even though its TDF is based on actively managed funds, not the trendier index funds. In March, American Fund TDFs were listed as top performers in several Lipper performance categories. The funds emphasize a shift to income-oriented equities over time, rather than simply reducing equity exposure. Its TDF assets grew by 27% in 2015 and 45% in 2016.

DFA differentiates itself by gradually moving investors to a safe 80% TIPS portfolio at the point of retirement. It entered the market in November 2015 and now has $323.5 million under management, according to Morningstar, for a growth rate of 1500% in 2016. Another fast grower last year was State Street Global Advisors, which grew 425% to $1.26 billion.

Even as the competition demands that TDF providers innovate more and devote more resources to their product—no TDF is really a passive investment, since the glidepaths require careful design—they face relentless downward pressure on fees. Eight years ago, the average TDF fee was 103 basis points.

Today, it’s 71 basis points, according to Morningstar, ranging from as little as 13 basis points to as much as 119 basis points. On a market-weighted basis, the median fee is only 51 basis points, because Vanguard, at 13 basis points, accounts for such a large market share. If you include TDFs that are CITs, the median actively managed TDF costs 45 to 60 basis points per year and the median passive TDF costs 10 basis points, according to Mercer.

Passively managed TDFs are of course cheaper than actively managed ones. They appeal to plan sponsors because of their ease-of-evaluation as well as their low cost. “The passive solutions have greater simplicity,” Mercer’s Lloyd told RIJ. “There’s less need for oversight. Investment committees don’t have to debate the fund management strategy.”

Well-publicized class action lawsuits charging plan sponsors with violating their fiduciary obligations to participants by offering funds with “excessive” fees have also driven employers toward indexed TDFs.

“Generally the lawsuits and fear of litigation have caused investors to gravitate to lower cost, and that’s naturally index funds,” said Morningstar’s Holt. “It’s not that everyone wants passive funds. The attention to fees take precedence over that.”

Retention issues

TDF providers have also tried differentiating themselves by offering customized lineups, while others have tried TDFs that include guaranteed lifetime income option. PIMCO, for instance, became a thought-leader in custom space when its DC practice leader, Stacy Schaus, published “Designing Successful Target-Date Strategies for Defined Contribution Plans” (Wiley, 2010), about the advantages of custom TDFs.

But custom TDFs have never taken off, partly because there’s already enough variety in terms of different glidepaths and asset allocations, Holt told RIJ. PIMCO, which has also seen a flight from its actively managed bond funds in recent years, has only $393.6 million in TDF assets, down 31% in 2016.

Prudential Retirement and Great-West differentiated themselves in the TDF space a few years ago when they introduced guaranteed lifetime withdrawal benefit riders on their TDFs. Prudential called its rider IncomeFlex and Great-West used the name Secure Foundation.

At the end of 2014, Prudential introduced Day One Target Date Funds, as CITs. At the end of 2016, Prudential followed up with Day One Mutual Funds, a series of target date mutual funds. In addition, there’s a separate Day One IncomeFlex Target Date series. Great-West told RIJ this week that it has $8.0 billion in target date assets ($6.9 billion in target date funds; $1.1 billion in target date trusts). Of that amount, $567 million is in accounts with the SecureFoundation rider.

TDF providers arguably need to explore income-generating solutions to slow the out-migration of assets at retirement. As Mercer’s report points out, retirees tend to liquidate their TDFs when they retire and roll over their savings to an IRA.

“Vintage year funds that had passed their target years experienced a decrease in total AUM,” the Mercer report said. “This is not a significant surprise, and although a variety of reasons can be proposed, we are confident the key reason is individuals rolling their assets out of their DC plans at or around retirement.”

The Fight over Symbols Prevents Real Reform

Posted on April 27, 2017 by Eugene Steuerle -

President Trump came into office promising to repeal the Affordable Care Act, abandon key multinational trade agreements, build a wall and send immigrants home, and reform the tax code. Many Democrats have sworn to oppose him at every turn.

On the first three items, he has already faced obstacles or stalemate and even temporarily left the battleground. But are these debates really about substantive reform that improves people’s lives? Or mainly over capturing symbols that appeal to each party’s base? Those goals aren’t the same.

Reform defies easy party or ideological labels because it often focuses not on bigger or smaller government but fixing poorly functioning operations, establishing greater equity among households, or adapting to new circumstances. With health, immigration, trade, and tax policy the need for constant real improvement conflicts with important, but often-counterproductive, fights over political symbolism.

Tax Reform. In taxation, the symbolic fights almost always center on the size of government and progressivity. Yet many of the tax code’s real problems are that it is inefficient, complex, and treats those with equal incomes unequally and inequitably.

The Tax Reform Act of 1986 neatly focused on the latter issues by making no significant change in either revenues or progressivity. But even in its early stages, the debate over a 2017 tax reform has already been muddled by a cacophony of mutually inconsistent goals: Reduce tax rates for multinational corporations and cut taxes for the middle class while not increasing the deficit or raising anyone’s taxes.

As long as lawmakers fight mainly over symbols rather than substance, they are unlikely to achieve many real improvements in policy. And tax reform will follow along the path down which health, immigration, and trade reform already seem headed.

Health Reform. When the Affordable Care Act (ACA or Obamacare) passed the Senate, backers knew it had flaws. They hoped to fix them later in the legislative process, but the death of Sen. Ted Kennedy cost Democrats their filibuster-proof majority in the Senate and made the fixes or amendments requiring a new Senate vote virtually impossible.

As a result, the healthcare community and households continue to grapple with an imperfect environment: Gains from expanded insurance coverage have been offset by slower than expected take-up rates, especially among young adults; for ACA marketplace policies, ongoing uncertainty about Medicaid expansions; and failure to come to grips with the full impact of health cost growth, often outside of Obamacare, on the federal budget.

Congress and President Trump have a chance to repair those problems, but both parties find themselves in a box. Republicans can’t accept any reforms that allow Democrats to claim “Obamacare” is being preserved, while many Democrats can’t swallow changes that acknowledge the ACA’s failures.

Trade Reform. Trade is another case where political symbolism impedes needed change. No doubt, our trading partners at times violate the spirit and even treaty letter of “fair” trade (so does the US), but trade agreements are the very vehicle for limiting such violations.

Rather than repairing these understandings, political symbolism demands they be torn up or abandoned. Thus, instead of reviving and revising the Transpacific Partnership, which might have enhanced US trade in Asia, the Trump Administration has scrapped it.

Any successful trade agreement must strengthen rather than weaken international commerce if it is to promote economic growth without raising consumer prices. But trade debates occur on treacherous political ground. Any shift in trade, no matter how good or bad, almost inevitably reduces demand for some US-made products and hurts the workers producing those goods, thereby creating a new group of populists who will cry “foul” that the President and Congress have once again abandoned workers.

Immigration Reform. People suffering from persecution, hunger, or lack of human rights will try to escape those horrors and find new opportunity. So it has always been and will always be. Borders are porous enough that there are tens of millions of immigrants, legal and illegal, in the United States and much of Europe.

Meanwhile, immigrants grow as a share of developed nations’ total populations, partly due to relatively low birthrates in the existing populations. We can reduce opportunities for legal entry, step up border patrols, build walls, and send even more people back to their prior country of residence.

But none of those actions really addresses the basic economic and social forces at play, while temporary symbolic political victories leave millions of families fearful of breakup, reduce domestic output by immigrant workers, and hurt America’s image as the home of freedom for people around the globe.

Today at the Retirement Industry Conference

Posted on April 27, 2017 by Kerry Pechter -

Here at the Retirement Industry Conference in Orlando, attendees just emerged from a panel discussion featuring Doug French of Ernst & Young and retirement plan executives Jamie Ohl of Lincoln Financial and Hutch Schafer of Nationwide Financial.

The topic was the Department of Labor’s fiduciary rule, which is currently being iced by the Trump administration like a rookie at the foul stripe near the end of a tournament final.

The consensus was that the DOL rule will not be rescinded. The “toothpaste is out of the tube and all over the table” is the reigning metaphor. Too much compliance work has already been done; in any case, the financial industry was headed toward fee-based advice and best-interest standards for some time, they said.

But they hope that commissioned sales will not disappear as a payment option, and they hope that some of the more irksome parts of the current rule might yet be surgically removed, and not simply delayed, by the Trump Labor Department.

Both Ohl, president of Lincoln Retirement Plan Services, and Schafer, vice president, business development at Nationwide Retirement Services, said their firms have already done most of the prep work to comply with the rule, and they’ve accepted that it will emerge in “some form.”

Ohl hopes to see the rule’s “private right of action” removed from the rule. Much of the retirement industry hopes the same, regarding this right as an invitation to the plaintiff’s bar to start preparing suits against deep-pocketed broker-dealers or retirement plan providers or plan sponsors for fiduciary violations.

The private right of action allows aggrieved financial services clients to participate in class action suits rather than submit to arbitration, where industry traditionally has home-court advantage. The Obama DOL insisted on the private right of action as a way to enforce the rule; the DOL lacks its own enforcement powers in this area.

To eliminate conflicts-of-interests in communications with plan participants, Ohl said Lincoln has already created two service groups, one that provides education only to participants and one that provides advice. The core service for plan sponsors is education; advice, either web-based or personal, is available as an option. With rollover marketing subdued, Ohl believes that IRA rollovers will decline and more money will stay in defined contribution plans after job changes or retirement.

On the annuity front, French, an actuary, said that variable annuity sales are down 30% because they’re very expensive when the benefits are properly priced. He recommended single premium immediate annuities and deferred income annuities as a better solution for retirees.

A panel representing the broker-dealers’ view of the impact of the DOL rule followed the first panel. Panelists included Ryan Abernathy of Merrill Lynch, Scott Stolz of Raymond James and Chuck Lucius of Gradient Financial Group.

Abernathy said that Merrill Lynch is now out of the brokerage IRA business and will serve IRA clients only with fee-based advisors. In a few months, he said, Merrill Lynch advisors will start selling fee-based annuities. Raymond James will continue to allow commissioned brokerage sales to IRA clients and its reps will use the Best Interest Contract Exemption to do so, Stolz said.

Stolz said that if, and only if, signing the fiduciary rule’s best interest contract allows Raymond James to collect less defensive documentation when advisors sell annuities on commission—paperwork that demonstrates that advisor compensation didn’t motivate the sale—then it would help annuity sales.

But if the burden doesn’t go away, he believes, annuities will be even tougher to sell on commission going forward. “Advisors will say ‘forget it’ and find another solution,” Stolz said. He was not hopeful. Commissioned sales will attract as much scrutiny as 1035 exchanges do today, he said. He added that, in the future, major broker-dealers will dictate shelf-wide commission levels to manufacturers, and commissions on similar products will be similar. But with so many differences between annuities, a multiplicity of commissions will remain.

Sales of SPIAs and DIAs will never be robust unless the federal government requires retirees to annuitize a portion of their savings, Stolz predicted, noting that research has shown that consumers expect much higher payouts from annuities than insurers could possibly provide.

Panelist Lucius and panel moderator Al Dal Porto of Security Benefit, in response to an audience question, said they believed that small insurance marketing organizations that distribute indexed annuities today will probably have to merge with larger organizations because they’re not large enough to act as supervising financial institutions under the DOL rule.

The conference, mounted by the LIMRA Secure Retirement Institute and the Society of Actuaries, welcomed about 400 attendees, which LIMRA said was consistent with previous years.

Journal of Retirement’s Spring Issue Appears

Posted on April 27, 2017 by Editorial Staff -

The Spring 2017 issue of the Journal of Retirement, Vol. 4, No. 4, has rolled out, with eight new articles on a variety of topics, encompassing public pensions, defined contribution plans, health status and retirement costs, “best interest” rollover decisions, TIPS, “white label funds,” and Social Security.

Here are the titles of the scholarly articles and abstracts of their abstracts:

Floods and Deserts: Why the Dream of a Secure Pension for Everyone Is Still Unattained, by Stephen C. Sexauer and Laurence B. Siegel. Many public defined-benefit pension plans have become seriously underfunded because pension sponsors made promises and budgeted for pension contributions as if the high stock market returns in 1982–1999 would continue, then entered a periodic historically low interest rates. The authors advise plan sponsors and beneficiaries to improve public sector productivity and using the cost savings to fill current funding gaps.

Health State and the Savings Required for a Sustainable Retirement, by W.V. Harlow and Keith C. Brown. The authors show that the savings required to fund a successful retirement for someone with one of several diseases whose impact on life expectancy has been estimated can be reduced by as much as 26% for females and 33% for males relative to the savings required for a healthy individual. Similarly, the savings required to fund healthcare expenses in retirement can be reduced by 29% to 39%.

Improving the Defined-Contribution System: The U.S. Can Learn from Other Countries’ Approaches to Helping Retirees Convert Their Savings into Lifetime Income, by Aron Szapiro. The authors explore several ways in which the U.S. drawdown system contrasts with other countries’ approaches, particularly in the encouragement given retirees to annuitize their assets. This discussion also addresses the role of regulation and industry structure in promoting lifetime income.

Do People Get the Information They Need When They Claim Social Security? by Laurel Beedon, Lilia Chaidez, Susan Chin, Mark Glickman, and Joel Marus. This study examines the extent to which people understand Social Security rules affecting their retirement benefits, and what information the Social Security Administration (SSA) provides to individuals. The problems the authors observed during the claims interviews occurred in part because the questions included in the claims process did not cover some key information.

Too Little or Too Much? Women’s Economic Risk Exposure, by Christian E. Weller and Michele E. Tolson. This article explores the reasons behind the inequality of wealth by gender, and urges employers and policymakers to consider ways to lower the costs associated with hard-to-avoid risks in the labor market and through caregiving as a way of addressing gender wealth inequality

To Roll or Not to Roll: A Framework for Assessing the Benefit of IRA Rollovers, by David M. Blanchett and Paul D. Kaplan. Noting that there is little research on what determines whether a rollover is in the “best interests” of an investor, Blanchett and Kaplan outline a framework to make this decision, with a focus on the potential decision to roll retirement plan savings into an IRA managed by a financial advisor. Fees, investments, and services offered, and the services being provided should all be considered, they write.

The Role of Long-Maturity TIPS in Retirement Portfolios, by Steve Sapra and Niels Pedersen. Long-duration Treasury Inflation-Protected Securities (TIPS) should play an important role in the portfolios of workers who are within 10 to 20 years of retirement, this article claims. Long TIPS provide them with a risk-free source of real retirement income.

White Label Funds: A No-Nonsense Design Handbook, by Rod Bare, Jay Kloepfer, Lori Lucas, and James Veneruso. “White label funds” are the next breakthrough for fiduciaries of large defined contribution plans committed to providing their participants with the best solutions, these authors argue. They cite pricing efficiencies, customization to specific participants, improved governance, safety with quality, and access to good low-cost defined benefit plan managers as the advantages that these generic investment structures offer.

Center for Retirement Research gets political

Posted on April 27, 2017 by Editorial Staff -

American workers without employer-sponsored retirement savings plans have long been able to contribute to individual IRAs instead, but they have never voluntarily done so in large numbers.

Nudging those workers into thrift by robo-signing them up for so-called “auto-IRAs” would be a good solution, according to a new brief from the Center for Retirement Research. CRR director Alicia Munnell and research associate Anqi Chen advocate a federal auto-IRA program or state-sponsored auto-IRAs like those initiated by California, Illinois, Oregon and Connecticut.

It’s a well-timed document. The humble IRA is at the center of the two biggest retirement-related controversies in Washington, D.C. today: the fiduciary rule and the exemption from ERISA for state-sponsored auto-IRAs.

The fiduciary rule, effective but currently detained, was created by the Obama administration because so much tax-deferred ($7.8 trillion) savings had leaked out of tightly-regulated 401(k) plans into the regulatory ambiguous zone of retail rollover IRAs, where advisors wanted to treat it with same opportunistic zeal that they treated after-tax retail money.

The Obama DOL regarded the growth of rollover IRAs as an unintended, unhealthy consequence of a gap in pension law, and wanted to correct it by disallowing the buyer-beware standard of advisor conduct with respect to all tax-deferred money.

In practice, this meant downward pressure on advisor and brokerage revenue, as well as worrisome new legal exposures for financial services companies. Industry appeals to sympathetic Republican lawmakers and to President Trump led to an executive order that has put the fiduciary rule on ice, probably for the rest of this year.

The exemption for state-sponsored auto-IRA retirement plans from the Employee Retirement Income Security Act of 1974 (ERISA) is also in limbo. The exemption, requested by states and cities and granted last year by the Obama DOL, allowed the states to proceed with their auto-IRA programs without having to worry about DOL meddling.

Advisors who sell 401(k) plans to small companies oppose the state auto-IRAs because they believe the government savings option will crowd them out of this market. Even though auto-IRAs are inferior to 401(k) plans in terms of contribution limits and tax benefits, the advisors worry that many small employers, if required to offer a payroll-deduction savings plan, will follow the path of least resistance and let states auto-enroll their workers into an IRA.

Evidently in support of these industry forces, Republicans have passed legislation that withdraws the ERISA exemption from cities. They are poised to remove it from the states. It remains to be seen whether states and cities will proceed with their auto-IRA plans without the assurance that the DOL won’t subject them to rules designed for defined benefit pensions.

The CRR writers take an unambiguous position on these issues. They lament the unintended growth of the rollover IRA as a retirement policy failure, and point to the state auto-IRA plans as a way to salvage the original mission of IRAs—filling in the coverage gaps of the voluntary defined contribution system.

“It is time to turn IRAs back into an active savings vehicle by auto-enrolling those without an employer plan into these accounts, with the ability to opt out,” the authors write. “Ideally, such an auto-IRA policy would be a federal government initiative. But, absent federal action, a number of states are stepping into the breach.”

Aria Retirement Solutions refreshes website, hires new president

Posted on April 27, 2017 by Editorial Staff -

Aria Retirement Solutions has added more personnel to its service desk and relaunched its website as RetireOne.com, according to a release from Aria chairman and CEO David Stone.

Aria’s RetireOne service desk, or Concierge Desk, and redesigned website are intended to help fee-based advisors buy annuities, guaranteed income and insurance products for clients at a reduced cost, the release said. Aria says it administers almost $1 billion of retirement savings and income investments.

“The RetireOne platform provides access to multiple insurance companies’ solutions on one non-biased platform. Our expansion supports the growth in our offering and reflects the industry-wide shift to fiduciary-friendly, fee-based solutions,” Stone said in a statement.

Newly-hired president Edward J. Mercier will lead sales and service, with responsibility for increasing advisor use of the company’s RetireOne platform for retirement income and wealth transfer solutions. Aria hopes to capitalize on the market created by the fiduciary rule for conflict-free investment advice.

Mercier has held senior leadership positions at Charles Schwab & Co., most recently as Head of Investment Management Distribution and Mutual Fund Clearing Services.

Honorable Mention

Posted on April 27, 2017 by Editorial Staff -

Allianz pursues ‘bots and machine learning’

Allianz, the world’s largest insurance company, has announced a partnership with Lemonade, “the insurance company powered by artificial intelligence and behavioral economics,” according to a release this week.

“Allianz is committed to staying at the cutting edge of insurance,” said Solmaz Altin, Chief Digital Officer at Allianz SE, in a statement. Details of the investment have not been disclosed.

“By replacing brokers and bureaucracy with bots and machine learning, Lemonade promises zero paperwork and instant everything,” the release said.

The Allianz Group serves 86 million retail and corporate customers in more than 70 countries. In 2016, over 140,000 employees worldwide achieved total revenues of 122.4 billion euros and an operating profit of 10.8 billion euros. Allianz provides property and health insurance, assistance services, credit insurance and global business insurance. As an investor, Allianz is active in debt, equity, infrastructure, real estate and renewable energy.

Lemonade Insurance Company is a licensed insurance carrier, offering homeowners and renters insurance. Lemonade is a Certified B-Corp whose underwriting profits go to nonprofits.

Great American collects photos of retirement well-being

Great American Insurance Group said it received more than 500 submissions after it invited its annuity customers to submit photos of “what makes their lives great,” the insurer said in a release.

Many of the photos submitted during the six-month promotional campaign came from retirees, who captured moments that “range from cheering on grandkids at a soccer game and relaxing on the beach to exploring the Grand Canyon and hiking through waterfalls.”

“Our customers purchase an annuity for a variety of reasons,” said Donna Carrelli, vice president of Annuity Marketing Services at Great American. Some of the participants in the campaign told her how an annuity has helped them.

“For some, it’s about protecting and growing what they’ve already saved or taking advantage of tax deferral. For others, it’s about receiving guaranteed retirement income or leaving an inheritance for their heirs,” she said.

Heffernan moves to Hueler from Fidelity

Elizabeth L. Heffernan has joined Hueler Income Solutions as Managing Director of Business Development responsible for growing overall business, creating new initiatives, and “ensuring a robust client-facing capability that advocates for and delivers personalized lifetime income to individuals,” according to a release.

At Fidelity Investments, Heffernan was most recently vice president of Investment Consulting, with prior roles in sales, marketing, employee education and product development in both retirement income and fixed return/stable value products.

Prior to joining Fidelity, Elizabeth worked in the employee benefits and compensation areas at Northwestern University and First Colonial Bankshares. She earned a Bachelor of Arts from the University of Iowa, holds NASD Series 6, 7, 63, and 24 licenses and is a Certified Employee Benefits Specialist and a Certified Financial Planner.

This Is How You Sell Annuities

Posted on April 20, 2017 by Kerry Pechter -

The advisor Curtis Cloke learned long ago that one way to sell annuities to wealthy near-retirees is to show them—“with science and math,” as he likes to say—that if they buy enough guaranteed income they can take much more risk with the rest of their cash and end up all the richer.

For two decades, Cloke perfected this formula over kitchen tables in farmhouses near Burlington, Iowa. Later he taught other advisors how to use his method through his “Thrive University.” Now he’s encoded his technique into a web-based software tool called “Retirement NextGen.”

Cloke is not the only retirement specialist to claim that, under certain conditions, a barbell portfolio of safe income annuities and risky equities can outperform a system of safe withdrawals from a conservative balanced portfolio in retirement—especially for long-lived people. But Cloke, blessed with preacher-like zeal and armed with computer-driven charts, has applied that principle with unusual success, earning wide recognition and demonstrating that, with proper framing, even the very rich will agree to annuitize as much as half their wealth.

Recently, RIJ sat in on an online demonstration of Retirement NextGen. You’ll see that the hypothetical couple bought four annuities; a fifth was suggested. These purchases were based on a real case. The couple bought a life annuity, an indexed annuity with a lifetime withdrawal benefit and a qualified longevity annuity contract—while more than doubling, somewhat counter-intuitively, the predicted size of their state.

“I purchased four very different annuities with the thought that this would prove the software was product agnostic and would appeal to more agents,” the trainer, Bruce Widbin, told RIJ. “I did not maximize wealth in this webinar but simply wanted to show what the software would be able to do.”

Tom and Sue, the millionaires next door

The sample case involved Tom, 61, and Sue, 59, both teachers, each with Social Security benefits, defined benefit pensions, defined contribution accounts, life insurance policies, a paid-off $200,000 home, and a modest lifestyle. In the absence of annuities, they were on track, given expected returns on their stocks and bonds, to leave an estate of about $1.9 million.

Tom could expect $2,470 a month from Social Security at full retirement age (FRA). He also expected a military pension of $2,400 a month (75% continuation). Tom also had $186,000 in a 403(b) account, a $33,000 traditional IRA, and a $17,500 Roth IRA.

Sue, who evidently saved much of her income, had $1.3 million in a 401(k) account, $92,000 in a traditional IRA, and $15,000 in a Roth IRA. She also expected $1,332 a month from Social Security at FRA and a school pension of about $2,800 (50% continuation) a month. Together, Tom and Sue also had more than $400,000 in after-tax mutual fund and bank accounts.

Tom and Sue were aiming for a monthly net income of about $7,000, or $84,000 a year. They wanted at least $60,000 in ready cash and hoped to leave at least $500,000 to their children. The Fact Finder function of the software also revealed these exceptional factors:

Both Tom and Sue wanted to retire several years before they qualified for Medicare
Tom was adamant about claiming Social Security benefits at age 62, despite the reduced payout
Sue wanted to wait until age 70 to claim Social Security benefits
The second to die would face a drop in Social Security and pension income
They were invested very cautiously, with an annual return of only 2.66%

Retirement NextGen is wired into the Cannex annuity database, so annuity quotes were close at hand. In this case, the advisor recommended that Tom and Sue purchase several annuity products with about $1.1 million of their roughly $2 million in investable wealth, for a total guaranteed income (counting Social Security and pensions) of about $9,000 a month:

$120,000 for a non-qualified period-certain annuity to pay for the couple’s health insurance until they qualified for Medicare and to provide bridge income while Sue deferred Social Security till age 70
$250,000 for a fixed indexed annuity with a GLWB that would begin payments after a 10-year deferral bonus period
$500,000 for a lifetime income annuity for Sue, starting immediately, with 2% cost-of-living adjustment and a death benefit
$125,000 for qualified longevity annuity contract with a death benefit (QLAC)
An optional $100,000 immediate annuity to pay life insurance premiums for the couple’s grandchildren.

The plan also included potential conversions of qualified assets to Roth IRAs and a Home Equity Conversion Mortgage line of credit. A HECM line of credit, untapped but steadily growing in capacity, could be used for emergency liquidity or as a hedge against a future decline in home prices.

The major selling point of this strategy for the client, according to Retirement NextGen’s calculations, was that Tom and Sue would never, even under the worst sequence of returns, need to sell depressed assets for monthly income. Coupled with their time horizon of 20 to 30 years, that freedom would allow them to ramp up their risk exposure.

The major selling point for a financial advisor with securities and insurance licenses, was an upfront commission of tens of thousands of dollars on the annuity purchases, plus one percent of the investable assets every year. Over the lifetime of the couple, the commissions and fees could amount to several hundred thousand dollars for the advisor.

Higher risk would produce higher expected returns and—the most persuasive aspect of the Retirement NextGen process—produce a final estate value that the software estimated at almost $4 million.

Contagious enthusiasm

After one of the Thrive University bootcamp sessions a few years ago in Burlington, Iowa, one of the attendees, a successful Mississippi Valley insurance agent, was asked if he could “do what Curtis does.” He replied that in theory he could but, in practice, he might need Cloke’s passion in order to communicate it effectively.

Indeed, Cloke (right), who in his youth was an Iowa gypsum miner and now teaches in The American College’s Retirement Income Certified Professional program, has a zeal that may not be reducible to an algorithm or a computer display. But he believes that his basic retirement income principle—to reduce longevity risk to near zero via insurance products in order to maximize investment risk with the remaining assets—can be applied to a greater or less degree by any properly-licensed financial advisor.

“We’re trying to educate clients that when more of their income is guaranteed, the less capital they will need to liquidate for income and the less sequence risk they will have,” Cloke told RIJ recently. “Your income isn’t tethered to market performance.”

Cloke’s method apparently works well when an advisor has to satisfy the psychic needs of two clients, one of whom dreams of potential wealth while the other fears destitution. “This works really well with married couples,” he said, “where the husband is a risk taker but the wife is worried that she’ll be left without any money. We satisfy both those ends.”

The high cost of unretired employees

Posted on April 20, 2017 by Editorial Staff -

Given today’s concerns about retirement security for Americans, it’s easy to forget that private pensions were not created solely to support workers in old age. Corporations created pensions to buy older workers out of their jobs at a specific age and replace them with healthier, less expensive younger workers.

With the shift to defined contribution plans, however, mandatory retirement ages are a relic. Today’s workers have to save for and schedule their own retirements. Many of those who have not saved enough are planning to remain at their jobs for a year or even several years longer expected.

The purposeful inertia of these older workers is going to cost corporations a lot, according to the study, “Why Employers Should Care About the Cost of Delayed Retirements.” The report was conducted by Prudential Financial. It is based on research and analysis by the University of Connecticut’s Goldenson Center for Actuarial Research.

The findings include:

Delayed retirement trend and the aging of the U.S. population are expected to result in a higher concentration of older people in the workforce. By 2020, 7% of the workforce will be over 65, up from 4% in 2010; 25% will be over 55, up from 18% in 2010.
Delayed retirements typically result in higher costs for employers, including increased compensation, DB and DC retirement plan costs, and group benefits costs. Annual healthcare costs for a 65-year-old or older worker are twice those of a worker between the ages of 45 and 54.
A one-year delay in just one person’s retirement would result in an incremental cost of over $50,000—the cost differential between the retiring employee and a new hire. For an employer with 3,000 employees and workforce costs of $200 million, a one-year delay in retirement age may cost $2 million to $3 million.

To help employees avoid delays in retirement, Prudential recommended that plan sponsors adopt these best practices:

Employer matches and default features. Design DC plans to encourage employees to save for retirement while optimizing employer contribution dollars. This includes adopting matching contribution formulas, automatic enrollment features, and automatic escalation features that encourage employees to start saving earlier in their careers and at higher rates.
Guaranteed lifetime income products. Make available guaranteed lifetime income products to help reduce the level of DC savings that employees need to generate their desired level of retirement income. Prudential’s research estimates that incorporating guaranteed lifetime income productsinto a DC plan reduces the level of assets required for a typical participant to retire at age 65 by 36%. Fifty-three percent of surveyed finance executives believe DC plan participants will make better behavioral decisions (e.g., not getting out of investments at the wrong time) if they are invested in an option that includes a guaranteed income feature.
Target-date funds. Provide Qualified Default Investment Alternatives, such as target-date funds. Fifty-three percent of surveyed finance executives say that participants are apt to make better investment decisions when presented with pre-packaged diversified investments like target-date funds.

The link between wealth, education and longevity

Posted on April 20, 2017 by Editorial Staff -

Two research papers released this month cite statistical evidence that wealthier, better-educated Americans can expect to live longer than poorer Americans and, as a result, can expect to collect significantly more benefits from social welfare programs like Medicare and Social Security.

The research is expected to inform the anticipated political debate over proposals to reform or refinance federal programs for the elderly. The retirement of the Babyboomer generation is expected to put unprecedented pressure on the solvency of those programs over the next few decades.

The authors of both studies point out that proposals to reduce the cost of Social Security by raising the full retirement age “are motivated by the rise in mean life expectancy.” They caution, however, that the average life expectancy “masks substantial differences in mortality changes across income groups.”

One of the papers, from the National Bureau of Economic Research, asserts that the longevity gap between rich and poor widened between 1930 and 1960. The life expectancy advantage of the 20% highest over the 20% lowest earners was just five years for men born in 1930. But it was almost 13 years for men born in 1960.

Because their lifespans of the wealthiest men born in 1960 are projected to be almost eight years longer, they can expect to receive an average of about $130,000 more in Medicare and Social Security benefits than the lowest-earning men over their lifetimes, the research showed.

The NBER paper, “How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms,” was written by well-known retirement researchers Alan Auerbach, William Gale, Peter R. Orszag, Justin Wolfer and nine other economists from the Brookings Institution, the University of Southern California, the University of California–Berkeley, the University of Chicago and other institutions.

A second paper, from the Center for Retirement Research at Boston College, focuses on the link between educational levels and expected lifespans among American men and women. It also focuses on life expectancy at age 65 rather than on life expectancies at birth.

“Between 1979 and 2011, period life expectancy at age 65 for men in the lowest to the highest educational quartiles increased by 4.1, 5.0, 5.4 and 5.9 years, respectively.” For women, the gains were at 1.3, 2.3, 2.5 and 3.7 years, respectively. “All SES groups are living longer, but the gains are greater for the most educated,” the paper said.

The study, like earlier studies by others, found that “white men in the bottom half of the education distribution aged 45-54 saw their mortality rates increase at a rate of 0.5% annually between 1999 and 2011, with a larger increase of 2.0% per year for women aged 45 to 54.”

The CRR paper, “Rising Inequality in Life Expectancy by Socioeconomic Status,” was written by Geoffrey T. Sanzenbacher and Natalia S. Orlova of the CRR, Candace C. Cosgrove of the U.S. Census Bureau and Anthony Webb of the Retirement Equity Lab at The New School’s Schwartz Center for Economic Policy Analysis.

Treasury solicits opinions about ultra-long bonds

Posted on April 20, 2017 by Editorial Staff -

The U.S. Treasury has asked for feedback from bond dealers about the feasibility and advisability of issuing government debt with terms of 40, 50 or even 100 years, the Financial Times reported this week.

The survey of primary dealers, institutions responsible for underwriting the US government’s debt, comes ahead of the Treasury’s next quarterly refunding announcement in early May.

The Trump administration and Treasury Secretary Steve Mnuchin is considering extending the term of government debt. Smaller countries, including Italy, Austria and Mexico, already have very long-dated bonds.

Mark Grant, chief strategist at Hilltop Securities, said the government would likely see demand from big insurance companies with long-dated liabilities. Some investors believe it would help the US Treasury to reduce borrowing costs for the taxpayer, the Financial Times report said.

The Treasury survey of dealers focused on the following areas:

“What factors should Treasury consider when structuring a security with a maturity greater than 30 years?
How, relative to the current 30-year bond offering, would Treasury expect to price ultra-long bonds.

This week, the 30-year Treasury yield fell to a new low for the year of 2.80%, down from 3.21% in mid-March. Very long-dated bonds sometimes trade more cheaply than shorter-dated bonds. A trader at one primary dealer said the lack of premium for investing long-term could dissuade some investors.

But the premium might not matter much. “Treasuries are a way station for many investors at times like this when they don’t want to be in other asset classes,” said William O’Donnell, a strategist at Citibank. “In many ways valuations don’t matter. Bonds are the anti-stock.”

The current 50-year swap rate in the US, which is closely linked to Treasuries, is about three basis points below the 30-year swap rate, suggesting that a 50-year bond could cost the government than the current 30-year bond, O’Donnell said, adding, “But much will depend on supply and demand, how much issuance they bring and how often it is auctioned.”

Americans like ‘fiduciary,’ but can’t explain it

Posted on April 20, 2017 by Editorial Staff -

Americans overwhelmingly favor the intent of the Department of Labor’s fiduciary rule, when requires financial advisors who provide advice to rollover IRA owners to act in their clients’ best interests, according to a survey by Financial Engines, a major provider of managed accounts to 401(k) plan participants.

The rule, created by the Obama administration and in effect since last June but not yet enforced, is under review by the Trump administration. Industry groups have been pressuring the administration and legislators to undo certain aspects of the rule, such as the right it gives aggrieved investors to file class action suits against financial services companies and the restraints that it applies to sellers of fixed indexed and variable annuities.

According to the survey, 93% of Americans think financial advisors who provide retirement advice should be legally required to put their clients’ best interest first. But more than half of respondents (53%) mistakenly believe that all financial advisors are already legally required to put the best interests of their clients first.

Compared to a similar survey last year, Americans have a slightly better understanding of the difference between a financial advisor who is a “fiduciary” and one who is not (21% understand the difference today, compared to 18% a year ago). However, many Americans still don’t know how to tell if an advisor is a fiduciary. Only 50% of investors who work with a financial advisor are certain that their advisor is a fiduciary, while 38% don’t know if their advisor is a fiduciary or not.

Complete results of the survey can be found at https://financialengines.com/workplace/resources.

Honorable Mention

Posted on April 20, 2017 by Editorial Staff -

Athene Holdings gets a ratings upgrade

A.M. Best upgraded the financial strength ratings of Athene Holding’s operating companies to “A“ (Excellent) from “A-“ (Excellent). The Long-Term Issuer Credit Ratings (Long-Term ICR) of Athene’s subsidiaries were also upgraded to “a” from “a-.” The outlook of these credit ratings was revised to “stable.”

The rating agency specifically cited Athene’s “strong risk-adjusted capitalization, a trend of strong profitability and recent sales growth through retail initiatives, including its position as a leader in the fixed-index annuity market” as well as “a strong management team with proven ability to grow capital both organically and through new capital generation and the company’s strong trend of earnings and capital growth” as reasons for the upgraded rating.

A.M. Best also noted that the “quality of the group’s capital is high, as the capital structure currently employs no financial leverage and the company recently completed its initial public offering in December of 2016.”

The Athene companies receiving financial strength ratings upgrade from A.M. Best include:

Athene Annuity & Life Assurance Company
Athene Annuity & Life Assurance Company of New York
Athene Annuity and Life Company
Athene Life Insurance Company of New York
Athene Life Re Ltd.

Concurrently, A.M. Best upgraded the Long-Term ICR to “bbb” from “bbb-” of Athene Holding Ltd. (AHL) (Bermuda). The outlook of this rating has been revised to stable from positive. AHL operates as the holding company for its U.S. and Bermuda operations.

Steve Harris to lead compliance at Lincoln Financial

Steve Harris has joined the Lincoln Financial Group as senior vice president and chief ethics and compliance officer, the Philadelphia-based financial services firm announced this week. Harris will lead Lincoln Financial’s enterprise compliance team and will report to Kirkland Hicks, executive vice president and general counsel.

Hicks joined Lincoln Financial in December 2015 and has been focused on enhancing the Legal Department since his arrival. Harris’ appointment follows the January 2017 hiring of Andrea Goodrich as senior vice president and corporate secretary.

Harris most recently served as vice president and corporate chief compliance officer for The Hartford Financial Services Group. Formerly, he was a partner at Wiggin and Dana LLP. Harris earned a J.D. from Hofstra University School of Law.

Fidelity & Guaranty Life terminates merger agreement

Fidelity & Guaranty Life has announced updates on its review of strategic alternatives. The company has terminated its merger agreement with Anbang Insurance Group.

“The Company’s Board of Directors is continuing to evaluate strategic alternatives to maximize shareholder value and has received interest from a number of parties,” FGL said in a release. As permitted under the February 9, 2017 amendment to the Merger Agreement, FGL has been exploring and negotiating strategic alternatives with other parties. The Company was not permitted to enter into a definitive agreement with a third party while the Merger Agreement was in effect, but as a result of the termination of the Merger Agreement, FGL has no remaining obligations under the Merger Agreement and may enter into an alternative transaction.

“We have determined that it is no longer in the best interests of FGL’s shareholders to continue to pursue the transaction with Anbang,” said Chris Littlefield, President and CEO of FGL.

“Our business remains strong, we continue to focus on delivering on our plan for the year and our distribution partners and employees continue to be committed to our success. FGL is an attractive platform and we are well positioned to realize value for our shareholders as our Board continues to evaluate strategic alternatives.”

Boeing’s 401(k) Joins the Hueler Annuity Platform

Posted on April 19, 2017 by Kerry Pechter -

Boeing, sponsor of the largest 401(k) plan in the U.S., has decided to offer its plan participants access to Income Solutions, the annuity platform that allows participants to obtain annuity quotes and buy income annuities online, Kelli Hueler, CEO of the Hueler Companies and creator of Income Solutions, told RIJ yesterday.

The Hueler Companies also announced this week that it has improved its platform to better serve large plan sponsors. “Our new site is the first step in a series of planned technology enhancements designed to improve the participant experience, increase delivery flexibility, and facilitate greater connectivity between 401(k) investment options and lifetime income alternatives,” Hueler told RIJ.

Boeing’s DC plan, the Voluntary Investment Plan, has more than $47 billion in assets and more than 200,000 current and retired participants. Other large 401(k) sponsors using the Hueler platform include IBM (the second largest U.S. defined contribution plan) and General Motors (the seventh largest). Vanguard, the giant full service 401(k) provider, provides access to the Hueler platform for all of its plans’ participants and its mutual fund shareholders. Hueler is based in Eden Prairie, Minn., a suburb of Minneapolis.

Lots of players in the retirement industry have observed the incomplete nature of the defined contribution system, which helps people accumulate savings but doesn’t help them turn the savings into what they’ve been saving for: retirement income.

Certain plan providers, such as TIAA, and a few life insurers, like MetLife and Principal Financial Group, are active in the so-called in-plan annuity market, where participants buy future income with their salary deferrals at below-retail and gender-neutral prices. But most plan sponsors, fearful of legal entanglements, have avoided in-plan annuities.

Hueler’s platform offers a simpler, out-of-plan annuity option. “I first assumed back in 2000 that we’d be serving the in-plan distribution option, I had no idea that we would have to create a rollover capability,” said Hueler (at right). “But this is what the plans needed. Our connectivity is simple and straightforward. Its easy to implement anywhere with any plan. We don’t need a lot of infrastructure. We’re just a link on the benefits portal.”

Hueler’s web-based Income Solutions platform, established 10 years ago, sits outside 401(k) plans (and outside their recordkeeping platforms). Participants use the platform to roll over all or a portion of their 401(k) balances to an IRA. They can then apply the IRA assets to the purchase of an immediate or deferred income annuity. One of Hueler’s salaried, licensed agents executes the sale.

The platform was designed by Hueler to change the informational asymmetry of the typical retail annuity sales process. Hueler wanted potential annuity buyers to be able see a cross-section of bids, the way personal advisors can, rather than one annuity price in isolation. The annuity contracts are gender-specific, meaning that the payouts are higher for men than for women.

The annuity manufacturers that offer products on the platform submit competitive prices that Hueler says are often significantly lower than those offered in the retail channel. Some insurers, like New York Life and Northwestern Mutual, have declined to participate in the platform out of reluctance to create competition with their other distribution channels, such as captive agent forces.

The life insurance companies that offer bids for single premium immediate annuities, deferred income annuities and qualified longevity annuity contracts at Income Solutions include AIG, Integrity Companies, Lincoln, Mutual of Omaha and Symetra. (These are the firms that bid on business from Vanguard clients; the mix of life insurers may be different for different plan sponsors.)

Plan sponsors typically conduct months of due diligence before deciding to use the platform, Hueler said.. Many of the large plan sponsors are long-time customers of one of her companies, which sells data on stable value funds to plan sponsors. “We’ve had our Stable Value Analytics business for 30 years, and when we designed the Income Solutions program in 2000 we met with large plans across the country, many of whom used our stable value product,” Hueler told RIJ.

Many jumbo plan sponsors no longer offer defined benefit plans but have a tradition of doing so. Providing access to annuities through Income Solutions allows them to satisfy their sense of responsibility to long-tenured employees without undertaking the chores or assuming the liabilities of a formal defined benefit pension.

Besides using her own network of relationships, Hueler develops clients for the platform through partnerships with plan providers and certain fee-only plan sponsor advisors. Plan sponsors each pay the Hueler Companies a flat annual fee for access to the platform. Hueler earns an additional service fee when it fulfills a transaction between a participant and an annuity manufacturer.

Some of those access fees have recently gone to pay for technology upgrades at Income Solutions. The service has a new website and a new ability to create and push out projections of future monthly income, based on real-time pricing, to the desktops of thousands of plan participants. Repeatedly reminding participants that the real goal of saving is to produce income is considered essential to preparing them to make the decision to purchase an annuity at retirement.

“With the automated nudging that we’re creating, we’re hoping to move the needle in the participant space,” Hueler said. “If a plan sponsor wants to show participants exactly how their balances equate to income, we can process thousands of lives at a time. The information will be made available to them. The idea is to push more communication out to the participant on automated basis.”

“If you just put an annuity in front of people,” she added, “they won’t have much interest in it. But if you show them that it’s a way to create income for life, and if the messages touch them over and over instead of once in a blue moon or when they leave the plan, and if you offer an institutional value proposition that’s designed to be low cost, and then give them the ability to compare products and encourage them to take the next step, then I think we’ll see a shift in attitudes, and eventually even see people buying annuities inside their plans.”

iTDFs: ‘Self-Driving’ Retirement Cars

Posted on April 19, 2017 by Per U. K. Linnemann -

An awareness of the need to improve target date funds (TDFs), which according to Morningstar had a combined value of $880 billion in the U.S. at the end of 2016, has been steadily growing. As Nobel Prize winner Robert Merton has said, the use of an investor’s age as the sole determinant of a TDF’s glidepath doesn’t pass even a “minimal test of common sense.”

My startup company in Denmark has developed a new TDF design, which we call iTDFs. Our “smoothed income” approach gives each individual investor a dynamically self-adjusting glidepath with automatic re-balancing and re-allocation of assets.

Metaphorically speaking, we’ve added intelligent shock absorbers and an automatic transmission to existing TDFs. We’ve used these new features to convey clients seamlessly from the accumulation stage to the income stage. iTDFs, we believe, could be the retirement equivalent of self-driving cars.

A smoother ride

Smoothed income iTDFs can be delivered as a fully automated solution. They may also be developed for the Internet as a direct-to-consumer concept. The algorithm-based product design allows scalability, portability and low cost. It can work well for life and pension companies, banks, wealth managers, asset managers, financial advisors, “robo-advisors” or technology companies.

Where traditional TDFs never convert savings to income, iTDFs are designed to produce smooth income during retirement, either for a pre-defined period or, if combined with longevity insurance (e.g., a deferred income annuity or Qualified Longevity Annuity Contract) for as long as the account owner lives.

In our design, the level of retirement income is managed in a capital-efficient way using an innovative formula-based shock absorber that smoothes payouts by adjusting to fluctuations in portfolio value over time. The product doesn’t require additional assets as buffer capital, and the provider assumes no investment risk.

A choice between payment profiles can be offered. For instance, income could be weighted toward the early years of retirement, when retirees tend to be more active. It could be weighted toward the latter years to offset the effect of inflation. The shock absorbers could be adjusted to provide a “harder” ride, with some exposure to the ups and downs of the markets, or to provide “softer,” more level income.

Key benefits of iTDFs include:

Automated personalized investment management with built-in systematic withdrawals
The potential for investment growth in retirement
An optional lump-sum payout at the target date
Smooth payouts despite fluctuations in portfolio value
Seamless transition from wealth accumulation to retirement
Adaptability to “phased retirement”
A choice of investment risk levels
Contributions that can be fixed or variable, e.g., with annual adjustments

Automated personalized investment management can also be combined with longevity insurance. Smoothed income iTDFs can offer a liquidity period followed by a life contingent period with seamless transition between the two phases.

During the last-mentioned period you may still be invested in accordance with the dynamic investment strategy and receive an investment return as well as a return for being alive (mortality credits) that increase with age.

Moreover, iTDFs can be combined with an ongoing floor and ceiling approach on withdrawals, e.g., for fulfilling minimum and/or maximum required distributions.

A lot at stake

In sum, iTDFs present a comprehensive, holistic and customized approach to retirement. They offer the opportunity to co-ordinate investment, distribution, and longevity protection strategies. Relying on a robust algorithmic framework, they will fit easily into an increasingly digitalized and mass-customized world. Different versions of iTDFs can be tailored to local market conditions and purposes.

There is a great deal at stake. Americans held $25.3 trillion in household retirement assets at the end of 2016, according to the Investment Company Institute. Of that number, $7.0 trillion was in defined contribution plans and $7.9 trillion in individual retirement accounts (IRAs). As Ernst & Young’s Malcolm Kerr wrote last year, “There will be little margin for complacency in this space. Almost all players now recognize that managing money in retirement for, say, 25 years, generates significantly greater revenues than those generated during the accumulation stage.”

iTDFs’ smoothed income and lump sum solutions provide an opportunity for firms to obtain key competitive advantages and a differentiated position in the huge retirement income market place. More importantly, they represent an opportunity to improve the lives of millions of people throughout the world by giving guidance to their withdrawal decisions for a smoother retirement journey.

Many Happy Returns!

Posted on April 13, 2017 by Kerry Pechter -

Arriving about halfway between Mother’s Day and St. Patrick’s Day, Tax Day shares a bit of the spirit of both. It makes you want to cry, “Oh, Mama!” and then drown your sorrows in a pint of green beer.

But it’s not so bad. If taxes are your worst financial headache, you probably have a lot of money. If your property taxes reach well into five figures, then your public schools are probably top-notch and your roads pothole free.

Senior citizens in particular seem to resent taxes—probably because taxes are often their single biggest expense. Of the over-70½-year-olds who hate required minimum distributions—RMDs are just an annual tax bill for many of them—many don’t need the distributions for living expenses. If you like tax deferral, you should at least tolerate RMDs. They’re inseparable.

The news that Paul Ryan and his minions will try to reform the tax code this summer serves as a reminder that the federal government has always been perplexed about who and what to tax.

It was Alexander Hamilton who decided—perhaps anticipating the current president—that the new Republic should fund its war debt with duties on imports. Taxing trade was suboptimal, however. The duties were as costly to American shoppers as they were to European manufacturers.

Early in our nation’s history , according to Albert Bolles’ The Financial History of the United States from 1789 to 1860, an unidentified observer suggested a tax on the wages of sin:

“There was a writer who proposed that the debt should be paid ‘without oppressing the citizens’ simply by taxing the vices prevailing at that time, the chief of which were perjury, drunkenness, blasphemy, slander and infidelity,” Bolles, a finance professor at the Wharton School, wrote in a footnote to his 1883 work.

“‘Would it not then be worthy of our consideration, and that of the different Legislatures, to inquire whether a moderate tax upon every particular vice would not be more conducive to our welfare than the cramping of our foreign and domestic trade? Such a tax must of necessity yield a vast revenue and prove a most infallible scheme for our prosperity.’

“The writer suggested a modest tax on perjury, which he took ‘to be the most important and particular staple vice.’ Drunkenness ‘I would only tax sixpence,’ ‘as it might prove prejudicial to trade, as the revenue, to discourage it.’ ‘Swearing would be most universal benefit toward augmenting these funds,’ though he thought that military men would object, and claim an exemption from it.

“‘Conjugal infidelity, as the world goes at present, would furnish the public with a large sum, even at a very moderate tax; for it is now made an essential part of the polite gentleman’s character, and he that has prevailed on the greatest number proportionately rises in reputation.’ Luxuries were also to be heavily taxed, but he did not favor the taxation of bachelors.”

Perhaps because he was a bachelor. Tax reform, according to the late Sen. Russell B. Long of Louisiana (son of Huey P. “Kingfish” Long, Jr.), simply means, “Don’t tax you. Don’t tax me. Tax that fellow behind the tree.”

Not long ago, around midnight in a hotel bar, a very senior executive from a large financial services firm mused in my presence that if poor Americans paid more in taxes they might feel less entitled and more like stakeholders in our nation. I’m not sure about that.

As a self-employed person who writes painful quarterly checks to Uncle Sam and pays both ends of his Social Security tax, I made my peace with the infernal revenue service long ago.

Tax equity is an impossible ideal. But as long as the government keeps recycling its tax revenues (and then some) into the broader economy—into every capillary of the country, from Key West to Bellingham—I’m confident that we’ll all thrive, more or less.

When the financial circulatory system becomes sluggish, when embolisms and thrombi form, then national infarction and ischemic attacks become a danger.

Spruced-up variable annuities from Principal Financial Group

Posted on April 13, 2017 by Editorial Staff -

Two new variable annuities from Principal Financial Group have been approved by the SEC—Lifetime Income Solutions II and Pivot—and are now available to the investing public through Principal’s proprietary distribution channel and through third-party distribution.

With Lifetime Income Solutions II, a refreshed version of a product that Principal had issued for the last ten years, Principal offers two fairly straightforward guaranteed minimum lifetime withdrawal benefits, one of which offers a deferral bonus. One of the two must be elected at purchase.

On this product, Principal practices risk control by reserving the right to reset the fees, the payout rates of the age-bands, and/or the size of the deferral bonus every month, depending on changing interest rates. The product also limits the contract owner’s investment options to a handful of Principal funds.

“We issue a monthly supplement in which we declare the fees, the withdrawal rates and the roll-up,” said Sara Wiener, assistant vice president of annuities at Principal. “The current rates are 5.25% for a single life contract at age 65, 5.35% at age 70 and 5.5% at age 75. There’s an annual simple five percent bonus for the first 15 years of the contract or until the first withdrawal.”

The product offers two lifetime withdrawal benefits, the Target Income Protector, which offers the 15-year roll-up, and the Flexible Income Protector, which doesn’t.

The second product, the Pivot Series, is a two-sleeve variable annuity that offers conversion to a fixed lifetime income stream. The first sleeve, designed for accumulation, offers investors a wide-range of fund options. The second sleeve, called Deferred Income, contains transfers from the accumulation sleeve to the insurer’s general account.

At a date fixed at issue (but which the owner has one opportunity to change), the owner begins receiving annuity payments for life. If owners wish, they can annuitize the entire contract, including both the investment sleeve and the value of the deferred income account.

“This mirrors what we offer on the 401k side, with our Principal Pension Builder,” Wiener told RIJ. “We are one of the few retirement providers that offers a deferred income annuity investment option inside a 401(k). This is the same concept: Individuals control their assets, and sweep contributions over into a deferred income annuity that triggers payment at age 65.”

Product details

Lifetime Income Solutions II offers two guaranteed minimum withdrawal benefit options, Target Income Protector and Flexible Income Protector. Only Target Income Protector offers a deferral bonus and its equity investment options are restricted to managed-volatility funds. The Flexible Income Protector offers four equity funds, a balanced fund and a growth fund as well as managed-volatility versions of each.

Because of its deferral bonus, Target costs a little more than Flexible. The rider fee is 125 basis points, versus 105 basis points for Flexible Income Protector. (Principal reserves the right to raise the annual rider fees to as much as 200 basis points). Both riders have mortality and expense risk fees of 125 basis points and investment fees that range between 50 and 65 basis points. There is a return-of-principal death benefit (currently 25 basis points) and a stepped-up value death benefit (currently 35 basis points).

If a contract owner invested $100,000 at age 50 and made no withdrawals for 15 years, the annual single-life payout at age 65 would be at least $175,000 multiplied by 5.25% (at current rates) or $9,187.50 for life. With all-in fees for the Target version of the product at about 300 basis points per year, there would presumably be little chance for step-ups in that payment without a bull market.

The Pivot product, which shares the two-sleeve, deferred income annuity approach with the Guardian ProFreedom and ProStategies variable annuities permits dollar-cost averaging from an accumulation portfolio with many investment options into the deferred annuity portfolio. Income at the annuity date would be calculated based on interest rates at the time of the transfer.

The Deferred Income rider is automatically attached to the contract at issue and has no separate mortality and expense risk fee or investment fee, since the money is in the general account and the fees are embedded in the fixed annuity payout. A one percent annual fee is levied on the value of the accumulation sleeve (85 basis points for the M&E, and a 15 basis point administration fee), the investments cost 50 basis points per year or higher.

There are two additional noteworthy features on this contract. The Liquidity Max feature, priced at 25 basis points per year, allows no surrender-fee withdrawals from the accumulation sleeve during the six-year surrender period (in addition to the 10% free withdrawals).

In another liquidity feature, people who need a lump sum of cash during retirement can use the “Advancement Feature.” It allows for up to six months of annuity payments at once—followed by a period of no payments for six months—during the income period. This lump sum option can be exercised up to four times during the life of the contract, with resumptions of monthly payments between them.

Fixed annuity option added to AXA’s DC recordkeeping platform

Posted on April 13, 2017 by Editorial Staff -

“In-plan” annuity options, which allow retirement plan participants a chance to contribute to a deferred income annuity, are still a rarity in much of the defined contribution world, but TIAA, MetLife and Principal Financial Group have been quietly offering them for some time. (Prudential and Great-West offer lifetime withdrawal options to their DC clients as part of their target date funds.)

Now AXA is getting into the act. A fixed annuity option will be included with the new AXA Retirement 360, which AXA Retirement Plan Services describes as “an open architecture defined contribution mutual fund program designed for 401(k), 403(b), 457(b) and 401(a) plans” that enhances AXA’s existing recordkeeping platform. Kevin Molloy, Head, AXA Retirement Plan Services.

Besides offering participants access to the “broad mutual fund marketplace,” the enhancement provides “a non-mutual fund option for retirement certainty with the “AXA Fixed Account” through a group fixed annuity from AXA Equitable Life Insurance Company. The option offers “principal protection, liquidity and a guaranteed minimum interest rate on savings.”

“The fixed account is generally intended to provide a guaranteed rate of accumulation, but participants have the option to annuitize to receive a lifetime income,” AXA told RIJ in an email this week.

“It has a minimum guaranteed interest rate of 1.00%, the current interest rate may be higher. Participant assets in the fixed account are liquid and can be transferred to other plan investment options,” AXA said. “If the plan elects to terminate the fixed account, the plan may take payments over a 5-year period or pay a Market Value Adjustment, if applicable.”

AXA Retirement 360 provides:

An intuitive website and dedicated team of retirement professionals. While a dedicated on-boarding specialist manages the plan’s setup and transition via an all-paperless process, plan sponsors and their advisors can track onboarding progress with complete transparency through real-time updates so they always know the status of plans in progress.
Fiduciary protection through Wilshire Associates, an independent professional investment advisory and consulting firm, in the selection and oversight of their plan’s investment lineup.
Education tools and resources, including a guided, jargon-free enrollment tool and live chat option.
Simple investment selection process, with options to select funds based on their retirement date or risk tolerance, as well as the option for the AXA Fixed Account, tailored for those concerned with principal protection or those who want a degree of retirement certainty.

These are not your grandfather’s (or Gary Brinson’s) withdrawal rates

Posted on April 13, 2017 by Editorial Staff -

For advisors, two worthwhile articles on the topic of sustainable annual withdrawal rates from total-return retirement portfolios appear in this April’s Journal of Financial Planning.

In one article, Jack DeLong Jr. and John H. Robinson, creators of Nest Egg Guru planning software, write that a “spend bonds first” or a “simple guardrail” strategy (spend down stocks and bonds proportionately, but never liquidate depressed stocks) produce much more median final wealth than either “spend stocks first” or the often-used “spend down stocks and bonds proportionately and maintain a constant asset allocation” strategy.

In the second article, Morningstar’s David Blanchett asserts that clients can spend 6% per year if 95% of their wealth is in guaranteed income, but only 2% if just 5% of their wealth is. He adds that targeting a 75% Monte Carlo portfolio success rate can be better than demanding a 95% success rate–especially for clients with ample guaranteed income.

Advisors who like teasing out the various variables inside the Rubik’s Cube of withdrawal rate strategies should find these articles rewarding.

Allianz pursues ‘bots and machine learning’

Great American collects photos of retirement well-being

Heffernan moves to Hueler from Fidelity

Athene Holdings gets a ratings upgrade

Steve Harris to lead compliance at Lincoln Financial

Fidelity & Guaranty Life terminates merger agreement

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