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Honorable Mention

Posted on April 13, 2017 by Editorial Staff -

eMoney launches ‘best interest’ compliance tool despite uncertainty

The fiduciary rule may be delayed, but eMoney Advisor, the Fidelity-owned maker of financial planning software, said it would launched its Advisor Assurance software on schedule on April 4, according to a release this week.

Advisor Assurance, a new function on the eMoney dashboard, is intended to provide advisors, broker-dealer compliance officers and administrative users comply with “documentation and archival of advisor-client interactions throughout the financial planning process” in order to demonstrate compliance with the now-endangered rule.

Ed O’Brien, CEO of Radnor, Pa.-based eMoney Advisor, said users of AdvisorAssurance can:

Monitor manual account changes.
Assist with oversight of consolidated reporting.
Offer real-time access to seven years’ worth of a firm’s event logs.
Access deleted records.
Allow managers to review and approve advisor presentations.
Track email exchanges (an enhancement planned for 2017).

A year ago, O’Brien moved to eMoney from his post as senior vice president for head platform technology at Fidelity Investments, which bought eMoney two years ago. A long-time IT specialist, he was granted a patent in 2011 for the technology design behind WealthCentral, a platform for registered investment advisors (RIAs). He also launched AdvisorTech, a technology platform for financial advisors in Japan, South Korea, and Germany.

Advisor Assurance is part of eMoney’s Fiduciary Framework, a response to the fiduciary rule’s promulgation last June. Nearly 10,000 of eMoney’s 45,000 clients have adopted or are implementing Advisor Assurance, including financial institutions, broker-dealers, insurance companies and RIAs.

In 2016, New York Life again dominates income annuity sales

New York Life Insurance Company set new company records in life insurance and annuity sales, life insurance in force, dividend payout and surplus for 2016, the giant Manhattan-based mutual insurer announced this week.

The performance of the company’s core life insurance business and annuities and asset management operations enabled New York Life to pay out a record amount in dividends to its whole life policy owners and benefits to its customers, while producing an all-time high surplus.

In 2016, the firm said it posted its 20th consecutive year of growing life insurance sales through its agents. Strong results from the company’s in-force block of life insurance and annuity products helped raise the surplus and asset valuation reserve to a record $23.3 billion, despite a record dividend payout and the low-interest rate environment. New York Life said it remains one of only two companies out of more than 900 in the life insurance industry to receive the highest financial strength ratings from all four major financial rating agencies, Standard & Poor’s, Moody’s, Fitch and A.M. Best.

Performance highlights as of December 31, 2016 included:

$1.95 billion in operating earnings for 2016, the second highest in company history.

$10.1 billion in dividend and benefits paid to policy owners.
$1.8 billion dividend payout, a 35% increase since 2012.
$1.3 billion in life insurance sales and $957 billion in in-force policies, both record highs.
$13 billion in annuity sales, a record high.
24% market share in fixed immediate annuities
33% of the deferred income annuity market.
$230 billion in cash and invested assets in the general account, and $538 billion in total assets under management.

About one in four Americans feels financially insecure: Northwestern Mutual

While Americans feel like the country is currently “on firmer financial footing” today, overall confidence has waned, according to new research by Northwestern Mutual. The company’s 2017 Planning & Progress Study found:

43% of U.S. adults 18 and over say the economy will be better this year than in 2016 (up from 31% who said the same last year).
72% of Americans feel financially secure.
48% of U.S. adults aged 25-65 say most Americans can still attain “the American Dream” (down from 58% who said the same in 2009).

The Planning & Progress Study is an annual research project commissioned by Northwestern Mutual. It explores Americans’ attitudes and behaviors toward money, financial decision-making, and the broader landscape issues impacting people’s long-term financial security.

Financial vulnerability: down but still high
The 2017 Planning & Progress Study suggests that while Americans still feel a high degree of financial vulnerability, there are some signs of improvement over last year:

67% of U.S. adults 18 and over believe that, over time, there will likely be more financial crises (down from 76% who said the same in 2016).
43% of U.S. adults say the economy will be better this year than in 2016, versus 31% who said the same last year.
72% feel financially secure.
38% expect their financial security to increase in the next year.
19% expect to feel less secure in the coming year.
28% of Americans feel a level of financial insecurity.
11% feel “not at all secure.”

Financial habits are slipping
Despite widespread expectations that financial crises are likely to occur again, people are slipping in terms of their long-term financial planning. The study found:

50% of U.S. adults 18 and over say they need a plan that anticipates up and down cycles (down from 57% who said the same last year).

41% say their long-term savings strategy has a mix of high-risk and low-risk investments, compared to 44% last year.

About the study
The 2017 Planning & Progress Study was conducted by Harris Poll on behalf of Northwestern Mutual and included 2,117 American adults aged 18 or older (2,117 interviews with U.S. adults age 18+ in the General Population and an oversample of 632 interviews with U.S. Millennials age 18-34) who participated in an online survey between February 14 and February 22, 2017.

Funded status of biggest pensions hovers at about 81%: Milliman

In 2016, the funded status of America’s 100 largest pension plans fell by $21.7 billion, according to Milliman’s 2017 Pension Funding Study. Although plan assets appreciated by $32.3 billion, the funds’ projected benefit obligation rose by $54.0 billion.

The Milliman 100 plans finished 2016 with a funded ratio of 81.2%, down only from 81.9% the year before. But the incremental drop in funded status “masked a year that experienced volatility across the board for pension plans,” according to the global consulting and actuarial firm.

“The last year was a tug-of-war for these pension plans,” said Zorast Wadia, consulting actuary and co-author of the Milliman Pension Funding Study, in a release.

While the funds’ overall 8.4% investment return in 2016 was far higher than the 0.8% return in 2015, the discount rate fell by 30 basis points. The funded ratio oscillated for most of the year before the post-election bump and ended the year close to where it began.

Study highlights include:

Analysis of asset gains. The 8.4% investment returns were well above the expectation of 7% set for 2016. Employers’ 2016 plan contributions were up 38% from the year prior. Higher plan contributions improve funded status and reduce PBGC premium expenses.

Impact of updated mortality assumptions. Future life expectancy declined for the second year in a row, resulting in significant reductions in projected obligations for several Milliman 100 companies.

Use of spot rates increases by 24%. Of the largest 100 plan sponsor companies, 46 will consider recording the fiscal year 2017 pension expense using an accounting method change linked to the spot interest rates derived from yield curves of high quality corporate bonds. The move to spot rates will result in pension expense savings.

Pension Risk Transfers continue. The estimated sum of pension risk transfers to insurance companies (“pension lift-outs”) and settlement payments increased from $11.6 billion in FY2015 to $13.6 billion in FY2016.

The Case for ‘Behavioral’ Portfolio Theory

Posted on April 12, 2017 by Meir Statman -

A segment of “60 minutes,” the television program, featured Leona and Harry Helmsley, owners of the Helmsley Palace Hotel and 200 other New York buildings. Leona described the expressive and emotional benefits they derive from their wealth as they stand on a hotel balcony overlooking New York’s Central Park. Harry points at buildings and says: “I’m taking inventory. I own this, I own this, and that one, and that one.”

Behavioral portfolio theory describes portfolios on behavioral-wants frontiers and prescribes them to investors whose wants extend beyond the utilitarian benefits of high expected returns and low risk, to expressive and emotional benefits such as those of demonstrating sincere social responsibility, high social-status, hope for riches, and protection from poverty.

People are not likely to distinguish an 80% probability of reaching a goal from a 90% probability, but they are likely to distinguish something they need from something they merely want, and something they wish they had from something they dream they will have.

The process of sequencing “goals to reach” and “circumstances to avoid” transforms advisers from experts at investment management or estate planning to competent and caring professionals, good at eliciting clients’ wants and associated goals and helping clients satisfy them.

The portfolio pyramid

A central feature in behavioral portfolio theory rests on the observation that investors view their portfolios as sets of distinct mental account layers in a portfolio pyramid. Each mental account corresponds to a particular want, associated goal, and their utilitarian, expressive and emotional benefits.

An optimal behavioral-wants portfolio is one that balances wants while avoiding cognitive and emotional errors. Consider a 50-year-old investor with a $1-million portfolio, described by Harry Markowitz, Meir Statman and two of their colleagues. She divides her portfolio into three mental accounts of wants and associated goals, specified as target wealth at target dates. She places:

$800,000 in a mental account dedicated to retirement spending, with a $1,917,247 target wealth goal, implying a 6% annualized return during the 15 years till the target date.
$150,000 in a mental account dedicated to education expenses, with an $188,957 target wealth goal, implying a 8% annualized return during the 3 years till the target date.
$50,000 in a mental account dedicated to bequest money, with an $850,003 target wealth goal, implying a 12% annualized return during the 25 years till the target date.

Each mental account is optimized by the mean-variance procedure, where risk is measured by the standard deviation of returns.

Our investor faces three investments: a bond mutual fund with a 2% expected annual return and a 5% standard deviation of returns; a conservative stock mutual fund with an 8% expected annual return and a 20% standard deviation of returns; and an aggressive stock mutual fund with a 15% expected annual return and a 40% standard deviation of returns. The correlations between the bond fund and each of the two stock funds are zero. The correlation between the returns of the two stock funds is 0.25.

The investor calculates optimal mean-variance portfolios for each of the three mental accounts and the portfolio as a whole, displayed in Table 8-3. The annualized standard deviation of the returns of the retirement mental account is the lowest at 10.45%, followed by the 15.23% of the education mental account and the 25.28% of the bequest mental account.

The 6.60% expected return of the portfolio as a whole is a weighted average of the returns of the portfolios of the three mental accounts, but the 11.85% standard deviation of the portfolio as a whole is lower than the weighted average of the standard deviations of the three mental accounts. All the mental accounts and the portfolio as a whole are on the behavioral-wants frontier.

The proportion allocated to the bond fund is highest in the retirement mental account, lower in the education mental account, and lowest in the bequest mental account. Arranging the portfolio as a set of the three mental accounts does not imply that we need three “real” bond accounts, one for the bond fund in the retirement mental account, another for the bond fund in the education mental account, and a third for the bond fund in the bequest mental account.

Instead, we have one real bond account and three “virtual” bond accounts listing the allocation in the bond fund of each mental account. Investors can observe portfolios in two formats, an actual account format for the portfolio as a whole and a virtual account format for each of the mental accounts.

The presentation of the portfolio as a whole, with the sum of the three mental accounts has an advantage over a sole presentation of the portfolio as a whole. The mental accounts presentation speaks the language of normal investors. Investors want to reach their goals, not only have portfolios on the mean-variance frontier.

Wants-based mental accounts let investors articulate each want and associated goal, the target wealth at the target date, and the attitude toward risk, measured by standard deviation, in the mental account of each want and associated goal.

The Fed Reveals its Game Plan

Posted on April 12, 2017 by Stephen Slifer -

In the minutes of the most recent meeting of its Federal Open Market Committee the Fed indicated that it would most likely raise the funds rate another two times between now and the end of the year. That would boost the funds rate to 1.25%, which still leaves it far below the so-called “neutral” level of 3.0%. The Fed then plans to take a break from raising short-term interest rates and turn its attention to the reserves issue.

By year-end it will begin to eliminate excess reserves in the banking system. As part of its easing initiative in the wake of the recession the Fed embarked on an unprecedented bond-buying program. It purchased U.S. Treasury bonds and mortgage-backed securities from banks and put the proceeds from those transactions into a bank’s checking account at the Fed, which is known as a “reserves” account. In the process the Fed’s balance sheet exploded as did the volume of surplus reserves in the banking system.

Before the Fed embarked on its bond buying program excess reserves were $2.0 billion. They have since climbed a thousand-fold to more than $2.0 trillion. Thus far those funds have been sitting idle in commercial bank accounts at the Fed. Banks have been unwilling or perhaps unable to lend those funds to consumers and businesses.

As long as those funds remain at the Fed the economy receives no stimulus. But if banks suddenly become more willing and/or able to lend, those reserves could fuel a spending spree the likes of which we have never experienced. Hence, the Fed eventually needs to eliminate those excess reserves.

But when should the Fed begin? And how should it proceed? The Fed recently provided guidance.

One option would be for the Fed to sell securities to banks in the same way that it bought those securities earlier. But to do that the Fed would need to enter the market via its open market operations and announce to the world what it is doing. It is a very visible action and sends an implicit message that it is aggressively trying to slow the pace of economic activity.

That is not the Fed’s intention. Rather, it wants to eliminate those reserves in a more subtle manner.

A second option for the Fed would be to hold U.S. Treasury bonds and mortgage-backed securities to maturity, and then not replace them. Like an outright sale this option would, over time, eliminate the surplus reserves in the banking system without sending a message to the world that it was aggressively tightening its monetary policy stance.

But because the average duration of the Fed’s portfolio is about six years, if it chooses this option it would take years for all surplus reserves to be eliminated.

If the Fed were to raise the funds rate and simultaneously allow long-term securities to mature it would, effectively, be doing two forms of tightening at the same time – raising both short-term and long-term interest rates — which could jeopardize the expansion. Thus, the Fed has indicated its intention to raise the funds rate twice more this year, but then stop raising rates for a while as it allows some of its bond holdings to mature. It will probably choose that second option for most of next year.

The bottom line is that the Fed has begun the process of reversing its wildly accommodative monetary policy stance by returning interest rates to a more normal level and gradually shrinking its balance sheet to eliminate the volume of surplus reserves in the banking system.

The days of ultra-easy monetary policy have come to an end. But the Fed is well aware that it cannot move too aggressively without endangering the pace of economic activity. As long as the inflation rate climbs slowly it can afford to proceed at a leisurely pace — raising short-term interest rates for a while, then allowing some of its bond holdings to mature. Given a snail’s pace of removing excessive monetary policy accommodation, it is hard to envision Fed policy threatening the economy any time soon.

Look for the economy to grow at a steady pace for years to come and ultimately produce a record-breaking period of expansion.

Time for Retirement ‘SeLFIES’?

Posted on April 6, 2017 by Robert C. Merton and Arun Muralidhar -

California, Connecticut and other U.S. states are preparing to introduce pension programs for workers who lack workplace savings plans. Although these programs can improve access to pensions, they perpetuate the troubling trend of transferring responsibility for retirement security from governments and employers to individuals.

This shift in responsibility requires bold new thinking about how portfolios are managed and which instruments are available to investors who are saving for retirement. Our proposed SeLFIES (Standard of Living indexed, Forward-starting, Income-only Securities) would introduce a simple, low-cost, low-risk, and liquid retirement income option to participants who are largely financially unsophisticated. It would make individuals more self-reliant and, by doing so, be advantageous to government.

The challenge

We believe that members of defined contribution (DC) plans should focus on maximizing their funded status or retirement income (not their wealth, as in traditional investment approaches) [1]. This is more difficult to do in DC plans than in defined benefit (DB) plans. Unlike multi-generational defined benefit (DB) plans, DC plans must achieve their objectives in a single lifetime, and it is hard to pool risks because these plans are so flexible. For instance:

Participation in these plans is likely to be voluntary.
Participants have clearly stated (e.g., in the case of California) that they would require liquidity.
Retirement ambitions, risk tolerance and life expectancy vary across age, gender and wealth levels.
Employment patterns change over time (i.e., the gig economy doesn’t tether an individual to one company) and these plans need to be portable across state lines.

Given these circumstances, a new financial instrument is needed to enable financial security for retirees in the current environment.

The innovative SeLFIES design

DC investors seek to ensure a guaranteed, real income, ideally from retirement to death. They want to lead a lifestyle comparable to their pre-retirement lifestyle. But investing in existing risky assets (stocks, bonds, or REITs) doesn’t provide a simple cash flow hedge against desired retirement income. For example, viewed through the retirement income lens, a portfolio of traditional, ‘safe’ government securities, unless heavily financially engineered, would be risky because of the potential cash flow and maturity mismatch between traditional bonds and the desired income streams.

We think governments should issue a new ‘safe’ bond instrument, which we call SeLFIES. These would ensure retirement security and the government is a natural issuer [2]. A default-free bond offers certainty for DC retirement portfolios:

A commitment to pay over a particular time horizon (how/when one is paid).
A specific cash flow (what is paid). DC investors require a guaranteed cash flow that protects their real purchasing power in retirement. Two simple innovations could create the ‘perfect’ instrument.

The first innovation addresses ‘how/when one is paid.’ SeLFIES create forward-starting, income-only bonds. Forward-starting means that these bonds do not start paying immediately, but rather at some future date. Coupons-only payments would start at retirement and last for a period equal to the average life expectancy at retirement (e.g., U.S. bonds would pay for 20 years) [3].

Investors who are saving for retirement don’t need coupon payments while still employed (the payments would have to be re-invested and create interest rate risk) or a stub principal payment at the end. They need a smooth stream of real cash flows. That’s why SeLFIES are forward-starting and coupon-only. They pay people when and how they need it, blending accumulation and decumulation by incorporating the retiree’s desired annuity-like cash flow profile in the payout phase.

The second innovation addresses ‘what is paid’ by indexing the bonds to per capita consumption. With longevity increasing, cumulative increases in the standard of living can leave a retiree feeling ‘left behind,’ just as inflation causes nominal fixed income retirees to experience a decline in standard of living. Instead of a Treasury inflation-protected securities (TIPS)-like adjustment, focused solely on inflation, SeLFIES would cover both the risk of inflation and the risk of standard of living improvements. (Right, Robert Merton).

SeLFIES foster self-reliance

SeLFIES would pay the holder annually for 20 years, starting at a fixed future date with a fixed amount (say $5), indexed to aggregate per capita consumption [4]. Today’s 55-year-olds would buy the 2027 bond, which would start paying SeLFIES coupons upon retirement at 65 in 2027, and keep paying for 20 years, through 2047.

SeLFIES greatly simplify retirement investing by allowing participants to be self-reliant in managing their portfolios. These innovations allow anyone to plan his or her retirement—without requiring a forecast of expected returns, optimizers/retirement calculators, or even intermediaries.

For example, if investors want to guarantee $50,000 annually to maintain their standard of living risk-free for 20 years in retirement, they could buy 10,000 SeLFIES ($50,000 divided by the $5 real coupon) over their working lives. The complex decisions of how much to save, how to invest, and how to draw down are simply folded into a calculation of how many SeLFIES to buy.

In addition to being simple, liquid, easily traded, and with low credit risk, SeLFIES can be bequeathed to heirs, unlike high-cost, inflexible and illiquid annuities. The inheritability of SeLFIES overcomes investor fears that premature death will “leave money on the table.” Buying SeLFIES would be similar to creating an individual DB plan, with a guaranteed pay-out determined by the number purchased. Further, investments in these bonds would be portable across states.

SeLFIES could become the safe asset in target-date strategies, in lieu of inflation-linked or GDP-linked bonds. They could also be used as safe, liability-hedging assets in dynamically managed target-income strategies—allowing investors to target a higher retirement standard of living or higher income by investing in risky assets early in their life cycles, then investing in SeLFIES dynamically to lock in their gains. (Left, Arun Muralidhar).

Further, simple account statements would illustrate the level of real, locked-in retirement standard of living, based on the number of bonds purchased. In today’s DC plans, statements that focus on wealth accumulation give investors no sense of their retirement standard of living or how they can achieve their retirement objectives.

The design of SelFIES would provide plan sponsors with a low-cost, low-risk default option for participants, and a safe harbor from legal risk. Furthermore, the insurance industry could use SeLFIES to improve their ability to hedge liabilities and to offer new low-cost annuities.

Longevity risk protection

As governments struggle to finance infrastructure, bonds with steady payments and forward-starting (deferred) payment dates offer an effective mechanism to finance such needs. Cash flows from SeLFIES offer governments an effective way to collect monies today for upfront capital expenditures for infrastructure projects, and pay these back in the future, once the projects generate revenues.

There are other benefits. Many U.S. DC corporate and endowment pension plan sponsors are being sued for allegedly costly or risky investment and pay-down options. There is a danger that, in response, many sponsors may choose not to offer any plans (DB or DC) to avoid legal risk. This would force more employees to make their own arrangements, and the resulting uncertainty would raise the cost to governments of ensuring retirement security among the aged.

SeLFIES can’t do everything. They can hedge interest rate, inflation, and standard of living growth risks, but they will not solve issues like insufficient savings, insufficient income growth (which locks in a low standard of living in retirement), or the cost of hedging longevity risk. For longevity risk protection, individual plan participants could purchase long-deferred annuities that pay out beyond age 85. The deferred annuity approach, combined with SeLFIES, would hedge individual longevity risk while preserving financial flexibility and control, and can be incorporated into a well-designed target income product.

Dr. Robert C. Merton, recipient of the 1997 Alfred Nobel Memorial Prize in Economic Sciences, is the School of Management Distinguished Professor of Finance at the MIT Sloan School of Management. He is also resident scientist at Dimensional Fund Advisors, a Texas-based global asset management firm.

Dr. Arun Muralidhar, author of “50 States of Grey and Rethinking Pension Reform” (with the late Franco Modigliani), is adjunct professor of finance at George Washington University, academic scholar advisor at the Center for Retirement Initiatives at Georgetown University, and founder of MCube Investment Technologies and AlphaEngine Global Investment Solutions.

Footnotes

R.C. Merton (2014). The Crisis in Retirement Planning, Harvard Business Review, July–August 2014.
Governments frequently serve the function of completing financial markets. Two examples related to meeting retirement funding needs are Japan’s issuing of a 40-year ultra-long bond in 2007 to provide a hedging instrument for pension funds and insurance companies, and UST issuing TIPS in 1997 to allow hedging of inflation risk.
See A. Muralidhar (2016). An Inventive Retirement Solution. Investment & Pensions Europe, June 2016.
A variation of this idea was first addressed in Robert C Merton (1984). On Consumption Indexed Public Plans. Financial Aspects of the US Pension Systems. Eds. Z. Bodie and J. Shoven, National Bureau of Economic Research, Cambridge, MA.

DOL Hints at Regulatory ‘Relief’ for Indexed Annuities

Posted on April 6, 2017 by Kerry Pechter -

When the Obama Department of Labor’s fiduciary rule, with little warning, decided last year that agents who sold indexed annuities couldn’t take commissions from insurers without signing the legally-binding “Best Interest” pledge to their clients, the $60 billion a year indexed industry went into fibrillation.

But the Trump DOL’s April 3 letter on the rule not only delayed its effect until at least the end of 2017, but also hinted that the DOL will reverse itself and allow complex indexed annuities and variable annuities to be sold on commission under so-called Prohibited Transaction Exemption 84-24, or PTE 84-24, which is the same light oversight applied to plain-vanilla fixed deferred annuities and single-premium immediate annuities.

“While it is not yet clear if the shift in allowing all annuity products to be covered by PTE 84-24 is more than a transitional tactic that will revert to the original plan next year,” wrote industry consultant Steven Saltzman in a client letter this week, “it could be a signal in terms of where a revision to the rule could be heading. At minimum, firms should consider outcomes related to the prospect of eventual use of PTE 84-24 for all annuities.”

Saltzman pointed page 55 of this week’s DOL letter:

“From June 9, 2017, until January 1, 2018, insurance agents, insurance brokers, pension consultants and insurance companies will be able to continue to rely on PTE 84-24, as previously written, for the recommendation and sale of fixed indexed, variable, and other annuity contracts to plans and IRAs,” it said.

“Some parties have expressed a preference to continue to rely on PTE 84-24, as amended in 2006, which has historically been available to the insurance industry for all types of annuity products,” the letter continued. “The Department notes that it is considering, but has not yet finalized, additional exemptive relief that is relevant to the insurance industry in determining its approach to complying with the Fiduciary Rule.”

If such “additional relief” is forthcoming, it could resolve the index annuity industry’s recent troubles. After peaking at more than $15 billion in the second quarter of 2016, sales faded somewhat in the second half of the year on fears that the fiduciary rule would discourage sales on commission. Rich commissions for insurance agents—along with a persuasive “downside-protection-with-upside-potential” marketing story—have driven the indexed annuity sales since its inception more than 15 years ago.

Lobbying almost certainly helped. There has been strenuous pleading by the National Association of Fixed Annuities and other insurance trade groups over the past year on behalf of indexed annuities, with “fly-ins” to Capitol Hill to visit legislators. Ironically, the same career DOL lawyer who wrote the Obama-era fiduciary rule, Tim Hauser, penned the latest letter.

“We are members of NAFA,” said Michael Tripses, CEO of CreativeOne, an insurance marketing organization whose agents sell indexed annuities. “Yes, we are tirelessly advocating and supporting legal costs. [We] will be lobbying the Hill in June. Of course others are lobbying as well, the American Council of Life Insurers, the Insured Retirement Institute, the National Association of Insurance Commissioners, et cetera, but NAFA is the one with the most focus on fixed annuities.”

More than 50 life insurance companies issue indexed annuities. Perennially, the largest seller has been Allianz Life, with a market share of 14.3% at the end of 2016. Its Allianz 222 product was the top selling indexed annuity for the tenth consecutive quarter in the fourth quarter of last year. The next four largest sellers included Athene USA, American Equity Companies, Great American Insurance Group, and AIG.

At least three insurers—Allianz Life, Great American, Lincoln Financial—created no-commission indexed annuity products in the past year. These contracts were designed to be sold by advisors who have stopped selling product on commission in order to avoid signing the fiduciary rule’s Best Interest Contract Exemption, and have switched to earning fee income based on a percentage of the value of the assets they manage.

The Best Interest Contract (BIC) Exemption is perhaps the most resented element of the Obama DOL’s fiduciary rule. In transactions where clients were using tax-deferred IRA money to buy an annuity or a mutual fund, the agent, broker or advisor couldn’t accept a commission from the product’s manufacturer without signing this contract.

Some broker-dealers have been willing to sign the BIC, while others have not. The contract was designed to make the commission, and the advisor’s conflict of interest between the client and the manufacturer, fully transparent. Most importantly, the contract enabled dissatisfied clients to participate in class action lawsuits against the advisor and his wholesaler or broker-dealer. In the absence of the contract, clients could only take their grievances to arbitration panels.

The April 3 letter and the delay of the fiduciary rule until the end of the year also makes moot, Tripses told RIJ, an earlier proposal by the DOL, published in the Federal Register last January 19, that would have allowed only the largest insurance marketing organizations (IMOs) to be paid as wholesalers of indexed annuities that were sold by agents receiving third-party commissions.

The DOL thought that only the largest IMOs could take on the legal liability and agent oversight responsibilities of the BIC Exemption. According to the January 19 proposal, the DOL would “require the insurance intermediary to have had annual fixed annuity contract sales averaging at least $1.5 billion in premiums over each of the three prior fiscal years to qualify as a Financial Institution.

“This proposed threshold is intended to identify insurance intermediaries that have the financial stability and operational capacity to implement the anti-conflict policies and procedures required by the exemption.”

A Bold, Direct-Sold, Multi-Premium DIA from Nationwide

Posted on April 6, 2017 by Editorial Staff -

Anticipating the Uberization of annuity sales, Nationwide is piloting a potentially all-digital, direct-sold, multi-premium income annuity called “Guaranteed Retirement Income from Nationwide.” It would provide “monthly income for life after age 65 in exchange for small, consistent contributions over time,” the company said in a release this week.

The new product, currently available only in a pilot program in Arizona and accessible only through a portal on Nationwide’s website and not available from advisors, is designed for middle-class investors over age 35 with household incomes between $50,000 and $200,000, Nationwide senior vice president of life and annuities Eric Henderson told RIJ in an interview today.

Marketing for the program will be largely passive, as Nationwide expects that self-directed people looking for retirement income will come across links to the portal during their online searches. If the program is successful in Arizona, the company plans a national launch.

According to Nationwide:

Consumers can sign up for the product and manage their accounts online. There are no fees to sign up or for on-going administration.
Contributions can be as small as $10 per month or $120 a year.
The product is a fixed annuity, paying an income that isn’t affected by market volatility.
Participants can contribute between $120 and $12,000 a year for 15 years or until they are 65, whichever is the longer period of time.
Customers may contribute monthly, quarterly or annually and can increase or decrease their contributions at any time.
Nationwide requires purchasers to make at least one payment per year for at least 15 years or it will return the premium to client without interest. Paying interest on surrenders would encourage clients to look at the annuity as an investment account, not an income source, Henderson said.
If the purchaser dies, any unpaid premium is returned to his or her heirs without interest.
Purchasers permanently lock in the interest rate that’s used at the time of their first payment. For the sake of simplicity, benefits are not recalculated when interest rates change.
An online calculator will show people, for instance, how much monthly income they can expect in retirement in return for predictable monthly contributions.
People with existing accounts can use a calculator after logging in to simulate changes to contributions and potential outcomes.

The product’s strategy and design are predicated on Nationwide’s market research, which has shown that more than half of middle-class Americans don’t work with a financial advisor, that most retirement savings options are too complex, and that only 58% of workers in the U.S. have access to an employer-sponsored retirement plan.

Nationwide has also concluded that enough people are now adequately comfortable with an all-digital solution, even for traditionally “sold, not bought” income annuities. The program is designed to be done entirely online, in do-it-yourself fashion, without even the licensed representatives that one might encounter while buying an annuity through Hueler’s Income Solutions, Immediateannuities.com, Annuityfyi.com, or Fidelity’s annuity platform. It’s Nationwide’s acknowledgement of the digital future, according to Henderson.

“Our research found that most consumers are comfortable managing their finances online, and fewer middle-income consumers are using financial advisors to help with retirement planning,” he said in a release.

“We also know that these consumers prefer to conduct upfront product research online. Guaranteed Retirement Income from Nationwide provides consumers with an online retirement income savings option that doesn’t require a large initial investment.”

As of March 2017, Guaranteed Retirement Income is available exclusively to residents of Arizona between the ages of 35 and 70. The state’s middle-market demographics reflect the country’s and the company’s “solid brand presence and awareness in the state” made it natural choice for the pilot, Henderson said.

Retirement Clearinghouse gathers allies for its ‘auto-portability’ solution

Posted on April 6, 2017 by Editorial Staff -

First there was auto-enrollment, then auto-escalation. The latest proposal on the table, one that’s waiting for the government to approve it as a qualified plan default for automatically enrolled qualified plan participants, is “auto-portability.”

Auto portability is described by its creator, Retirement Clearinghouse (RCH), as the “routine, standardized and automated movement of a retirement plan participant’s 401(k) savings account from their former employer’s plan to an active account in their current employer’s plan.”

Auto-portability is “designed to work within the existing platforms and data flows of the country’s qualified 401(k) plan system,” according to a release that followed a presentation on the subject in Washington, D.C. last week. The system was conceived by RCH, which is owned by Charlotte, NC, billionaire entrepreneur Robert L. Johnson.

The main purpose of auto-portability is to prevent “leakage”—that is, the tendency of job changers with small 401(k) balances to spend their modest savings before they have a chance to amount to much. If auto-portability were fully implemented and if future leakage were limited to “hardship” withdrawals, current and future retirement savers would save $2 trillion more, in today’s dollars, by age 65, according to data presented by the Employee Benefit Research Institute.

Jack VanDerhei, Research Director at EBRI, presented these findings at “Retirement Plan Portability & Public Policy: Unlocking the Potential in Portability,” a forum hosted by the Financial Services Roundtable on March 30, 2017 in Washington, D.C.

Other speakers at the meeting were RCH president and CEO Spencer Williams, former Sen. Kent Conrad (D-ND), representing the Bipartisan Policy Institute, and Steve Saxon, principal and chairman of Groom Law Group, who is RCH’s legal advisor.

In June 2016, the Bipartisan Policy Center’s commission recommended the establishment of a nationwide retirement account clearinghouse, operated by the private sector, to make sure that retirement savings account balances follow workers from job to job.

Retirement Clearinghouse, LLC is a provider of portability and consolidation services for defined contribution plans, receiving transfers of small-balance 401(k) accounts that former participants have left behind and providing them with rollover IRA custody services until the owners claim them.

Retirement Clearinghouse’s portability solutions include a domestic call center providing specialized assistance designed to enable end-to-end portability and account consolidation; uncashed check services; and the capability to search for lost and missing participants.

Established as RolloverSystems in 2001, Retirement Clearinghouse serves some 20,100 retirement plans with more than 1.1 million plan participants and more than $16 billion in retirement savings.

Retirement trade groups gird to protect ‘tax deferral’

Posted on April 6, 2017 by Editorial Staff -

An armada of retirement industry groups announced its intention this week to defend the nation’s $100 billion-a-year tax expenditure for incentivizing long-term savings from Republican tax reformers who might be tempted to cannibalize it to make room for cuts to income tax rates, the capital gains tax or the estate tax.

“Tax reform is a worthy goal,” said a release this week from the Save Our Savings Coalition. “On the other hand, misguided proposals could unintentionally undermine the incentive for employers to offer retirement plans or for working people to save,” said Jim McCrery, former Ranking Member of the Ways and Means Committee.

The membership list of the SOS Coalition encompasses a $25.3 trillion industry. That’s the value of U.S. retirement assets invested in the equity and fixed income markets at the end of 2016, the release said. The Coalition believes that, without the incentive of tax deferral, Americans would not save nearly as much as they do.

“We need to make sure people continue to have access to retirement plans,” the release said, “because everyone deserves the opportunity to retire with dignity and financial independence.”

Not all members of the coalition necessarily share the same views on all access-related issues. Some members recently applauded the legislative defeat of a regulatory exemption that would have made it easier for cities to require companies that don’t currently offer retirement plans to either sponsor a plan or default employees into state-sponsored IRA-based savings plans at work.

Under our voluntary 401(k) system, workers have no access to the largesse of tax deferral unless their employer chooses to set up a plan. Large companies almost universally offer retirement plans, but many small companies do not. Some studies show that only about half of workers have access to a retirement plan at work at any given time.

The Coalition includes:

American Benefits Council
American Retirement Association
Committee on Investment of Employee Benefit Assets
Defined Contribution Institutional Investment Association
Employee Benefit Research Institute
Financial Services Roundtable
Investment Company Institute
New Economics for Women
Northern Trust
Plan Sponsor Council of America
Principal
SPARK Institute
TIAA
Women’s Institute for a Secure Retirement

Anecdotal Evidence: Fresh News from the Emerald City

Posted on April 5, 2017 by Kerry Pechter -

A quick trip to Washington, D.C. last week yielded some new information about three issues: the fiduciary rule, the state auto-IRAs, and “auto-portability” of 401k accounts.

On the topic of the fiduciary rule, a lawyer for the major defined contribution recordkeepers has been trying to keep alive the idea of clearly exempting recordkeepers from liability to lawsuits for things—marketing messages instead of education—that their phone reps might say to 401(k) plan participants about rollovers.

Some recordkeepers also have IRA rollover businesses beyond their passive services as utilities in 401k world, and therefore have a potential conflict of interest when speaking to participants.

But, in visiting the Department of Labor on behalf of his clients, the lawyer has found no one to talk to at the Employee Benefits Security Administration but the same career DOL lawyer that served as point-person for the fiduciary rule that he talked to during the Obama administration, Tim Hauser. Hauser’s boss was EBSA chief Phyllis Borzi, and Borzi’s job has not been filled because Trump-appointee Alexander Acosta has not yet been approved as the new Secretary of Labor.

On state auto-IRAs, the Senate voted 50-49 on a straight party line basis against the exemption from ERISA that would allow cities and counties to be sure they didn’t have to answer to the DOL about their plans. (A vote against a similar provision that would have exempted states will presumably follow.)

Pensions & Investments magazine, the Investment Company Institute, which represents the mutual fund industry, and the American Council of Life Insurers promptly labeled the exemption an attempt to deprive workers of their right under ERISA.

That was baffling. In fact, they described the opposite of what the states like California and cities like New York have hoped to do, which is to get minority- and low-income workers to save, as the United Kingdom has done with its mandatory NEST defined contribution plan. They asked the DOL for exemption from ERISA for their plans.

Not everyone in the financial industry hates the state plans: State Street Global Advisors has signed up to run Oregon’s auto-IRA money in its target date funds. SSgA is, however, on the record as preferring a national DC solution to a patchwork of state-run plans.

If you look at where state-run plans have gotten traction, it’s been in blue states with strong union voices. Service workers unions, which get a sympathetic ear from legislatures in those states, have been trying to get workplace savings plans in the small businesses where their members work. No coincidence that they don’t get their way in Washington today.

The retirement industry is wary of the state Secure Choice automatic IRA plans, which most businesses without retirement plans would be required to offer their employees. These plans were an answer to the fact that at any given time, around half of U.S. workers don’t have a salary-deferral tax-deferred savings plan at work.

While some, like Brian Graff, CEO of the American Retirement Association, have said that a mandate for retirement plan coverage would create new demand for his private-sector 401(k) plan advisor members, many others, like the plan advisors who sell plans to small business owners and the mutual fund companies who distribute their funds through those advisors, are alarmed. They feel that state IRAs will lead to state 401(k)s and a serious crowd-out of private industry in the retirement plan space. Most of the nation’s 600,000 401(k) plans are small, but together they add up to a big industry.

Finally, the idea of “auto-portability,” a process for automatically moving 401(k) accounts to an employee’s new plan and recordkeeper if and when he or she changes jobs and gets auto-enrolled into a new plan, seems to have survived the transition from Obama to Trump.

Auto-portability has support from the Bipartisan Policy Center and former Sen. Kent Conrad (D-ND, 1992-2012), as well as from the Employee Benefits Research Institute. Auto-portability is a private for-profit venture by Retirement Clearinghouse (RCH). RCH calls it a way to solve the 401(k) “leakage” problem and, ultimately, the undersaving problem and the retirement income shortfall problem.

But auto-portability needs federal blessing before it can become a default feature in plans. Auto-portability also needs the willing cooperation of the big 401(k) recordkeepers, like Vanguard and Fidelity. Billionaire Robert L. Johnson, the founder of BET (Black Entertainment Television), owns RCH.

Conrad, Jack VanDerhei of EBRI, Spencer Williams of RCH, and Steve Saxon of Groom Law Firm, the attorney for recordkeepers, all sat on a panel last Thursday in DC to speak about (and in favor of) RCH’s idea. That’s an influential coalition. [RIJ has published several stories about RCH and auto-portability.]

Never a dull second in D.C. these days… but not much getting done. The DOL, as noted, still lacks an EBSA chief, which means career staff (aka “the deep state”), who doesn’t make big decisions, are still going through familiar motions. With attention in Washington now turning to tax reform—where the preservation of tax-deferral for long-term savings is the big issue for the retirement industry—it’s hard to imagine that Congress or the Trump administration will have much bandwidth or appetite for the thorny fiduciary rule.

DOL provides “significant relief” on fiduciary rule: Wagner Law Group

Posted on April 5, 2017 by Editorial Staff -

On Tuesday, April 4, the Wagner Law Group, headed by ERISA expert Marcia Wagner (left), issued the following report on the Trump administration’s actions on the Obama-era fiduciary rule:

The U.S. Department of Labor’s (DOL) proposed 60-day delay to the new fiduciary rule defining investment advice (Fiduciary Rule), the Best Interest Contract Exemption (BICE), and other related exemptions was finalized today.

The final rule codifying the delay will appear in the Federal Register on Friday, April 7, 2017 and take effect on Monday, April 10, 2017. This completes the delay process initiated by the February 3, 2017, Presidential Memorandum directing the DOL to study the impact of the Fiduciary Rule and the related exemptions.

The final rule is not a simple 60-day delay across the board. Rather, it significantly reduces the compliance burden of the Fiduciary Rule and the related exemptions during the transition period between the applicability date (formerly, April 10, now June 9, 2017) and January 1, 2018. As set out by the DOL, the final rule has the following components:

The “applicability date” of the Fiduciary Rule is extended for 60 days, from April 10 to June 9, 2017;
The applicability date of all of the new and amended exemptions is extended for 60 days, from April 10 to June 9, 2017;
From June 9, 2017 to January 1, 2018, anyone wishing to use the BICE, the Class Exemption for Principal Transactions or Prohibited Transaction Exemption 84-24, need only comply with the Impartial Conduct Standards (best interest standard of care, reasonable compensation and not making any materially misleading statements). Compliance with all other conditions of these exemptions, including written disclosures and representations, are waived until January 1, 2018;
Changes to other preexisting class exemptions amended by the DOL in connection with the Fiduciary Rule (Prohibited Transaction Exemptions 75-1, 77-4, 80-83, 83-1, and 86-128) are applicable and in full effect on June 9, 2017; and
The DOL will complete the mandated study of the Fiduciary Rule and the related exemptions and announce what actions, if any, will be taken as a result of the study, not later than (and hopefully well in advance of) January 1, 2018.

In sum, the DOL’s approach incorporates a 60-day delay of the applicability date of the Fiduciary Rule and related exemptions and a significant reduction in compliance burdens during the new transition period, i.e., the period from the June 9, 2017 applicability date to January 1, 2018, when the presumably amended BICE, the Exemption for Principal Transactions, and Prohibited Transaction Exemption 84-24 will be in full effect.

This approach essentially eliminates the need for transition agreements, disclosures, and certain structural changes (such as the appointment of a BICE officer) that were formerly required to be in place on the applicability date.

This should provide significant relief and appears to be an attempt to respond to widespread concerns about potential client confusion. The DOL stated that making the Impartial Conduct Standards effective on June 9, 2017, provides significant protection to retirement plans and retirement investors.

The DOL said it would continue to accept comments regarding the issues raised in the Presidential Memorandum. We are continuing to study the final rule announcing the delay.

Bank annuity income up 2.3% in 2016: MWA

Posted on April 5, 2017 by Editorial Staff -

Income earned from the sale of annuities at bank holding companies (BHCs) was $3.15 billion in 2016, up 2.3% for the year from $3.22 billion in 2015, according to the Michael White Bank Annuity Fee Income Research, released this week.

It was a feast-or-famine kind of year. While bank annuity fee income reached a record level in third quarter 2016, the other three quarters of the year were among the six smallest quarters in the last five years.

At $764.1 million, fourth quarter 2016 BHC annuity commissions were down 18.5% from the record $937.0 million in third quarter 2016 and down 4.2% from $797.3 million earned in fourth quarter 2015.

Findings of the study are based on data from all 5,913 commercial banks, savings banks and savings associations (thrifts), and 596 large top-tier bank and thrift holding companies (collectively, BHCs) with consolidated assets greater than $1 billion operating on December 31, 2016.

Of 596 large BHCs, 292 or 49% sold annuities during the year. Their $3.22 billion in annuity commissions and fees constituted 37.6% of total BHC annuity and insurance brokerage income sales revenue of $8.57 billion. Of the 5,913 banks, 875 or 14.8% sold annuity sales, earning $773.0 million in annuity commissions or 24.0% of total BHC annuity fee income.

“There were signs of improvement in BHC annuity earnings momentum,” said Michael White, president of MWA and author of the study, in a release. “Of 292 large top-tier BHCs reporting annuity fee income in 2016, 185 or 63.4% earned a minimum of $250,000 selling annuities, including seven new programs.

“Among those programs with at least $250,000 in annuity income, 65 BHCs or 35% achieved double-digit growth, up 18% from 55 BHCs in 2015. Still, that represented was also a 39-point decline from 2013, when 107 or 59% of 181 BHCs with at least $250,000 in annuity income achieved double-digit growth.

“We also examined 89 large top-tier BHCs with at least $1 million in annuity revenue in 2016,” the release said, “and 45 or 51% of them attained increases in their revenue compared to 41% in 2015. Those BHCs whose annuity revenues were up 10% or more numbered 31 in 2016, an increase of nearly 48% from 21 BHCs with double-digit growth in 2015.

“The proportion of significant players exhibiting growing annuity programs did increase, the rates of growth among them rose, and the increase in the number of significant players that experienced double-digit growth are indicators of what could be the onset of an overall growth period in bank annuity sales production.

“And, yet, we would not be overly enthusiastic, particularly because the regulatory environment remains hazy due to uncertainty relating to the Department of Labor’s fiduciary rule.”

More than two-thirds (70.8%) of BHCs with over $10 billion in assets earned annuity commissions of $3.11 billion, constituting 96.6% of total annuity commissions reported. This was 4.1% higher than the $2.99 billion in annuity fee income in 2015. Among the largest BHCs, annuity commissions made up 40.4% of their total insurance sales revenue of $7.70 billion, the highest proportion of annuity income to insurance sales revenue of any asset class.

Wells Fargo & Company (CA), Morgan Stanley (NY), UBS Americas Holding LLC (NY), JPMorgan Chase & Co. (NY), and Bank of America Corporation (NC) led all bank holding companies in annuity commissions and fees in 2016.

At BHCs with assets of $1 billion to $10 billion, annuity fee income fell 31.7%, to $107.6 million from $157.5 million in 2015, to comprise 12.4% of their total insurance sales revenue of $866.5 million.

Among BHCs with assets of $1 billion to $10 billion, annuity leaders included First Command Financial Services (TX), Wesbanco, Inc. (WV), First Commonwealth Financial Corp. (PA), United Financial Bancorp (CT), and Community Bank System (NY).

The smallest community banks, those with assets less than $1 billion, were used as “proxies” for the smallest BHCs, which are not required to report annuity fee income. Among these small banks, annuity fee income fell 15.2% to $55.8 million from $65.8 million in 2015.

Leaders among bank proxies for small BHCs were Bank Midwest (IA), First Federal Bank of Louisiana (LA), FNB Bank, N.A. (PA), The Security National Bank of Sioux City, Iowa (IA), and Heritage Bank USA, Inc. (KY).

Among the top 50 BHCs nationally in annuity concentration (i.e., annuity fee income as a percent of noninterest income), the median Annuity Concentration Ratio was 4.9% in 2016, down from 5.3% in 2015. Among the top 50 small banks in annuity concentration that are serving as proxies for small BHCs, the median Annuity Concentration Ratio was 12.4%, down from 15.0% in 2015.

Among the top 50 BHC leaders in annuity penetration (i.e., annuity fee income per one million dollars of core or retail deposits), the median Annuity Penetration Ratio was $666 per million dollars of retail deposits, down 11.3% from $751 in 2015.

Among the top 50 small banks in annuity penetration, the median Annuity Penetration Ratio was $1,296 per million dollars of core deposits in 2016, down 13.1% from $1,491 in 2015.

Among the top 50 BHC leaders in annuity productivity (i.e., annuity income per BHC employee), the median Annuity Productivity Ratio was $2,606 per employee in 2016, down 5.2% from $2,748 per employee in 2015. Among the top 50 small banks in annuity productivity, the median Annuity Productivity Ratio was $3,986 per bank employee, down 16.5% from $4,771 in 2015.

Note: Several BHCs that are historically insurance, securities or commercial companies have been excluded from the research in order to better understand the insurance performance of financial institutions that historically have engaged in significant banking activities.

Honorable Mention

Posted on April 5, 2017 by Editorial Staff -

MetLife begins advertising for Brighthouse Financial spinoff

With the premiere of “Predictability” television commercials, MetLife is kicking off a multi-platform (television, print, out-of-home, social media and CRM) advertising campaign to introduce its new brand for annuity and life insurance solutions, Brighthouse Financial.

Brighthouse Financial, an operating segment of MetLife that will start life with about 2.8 million insurance policies and annuity contracts in force, began using its new brand for its annuity and life insurance solutions last month. MetLife has initiated the regulatory process for its planned separation from Brighthouse Financial.

“We’re on a mission to help people achieve financial security, and our brand embodies that mission,” said Matt Quale, vice president and head of marketing at Brighthouse Financial, in a release this week.

“Our name combines optimism with stability. Our brand symbol incorporates a house to represent the protection products like annuities and life insurance can offer to a portfolio, with rays of light used to illustrate the confidence that comes from knowing you’ve planned for your future.”

The new commercials blend the Brighthouse Financial logo into “a diverse, yet familiar, set of life’s backdrops” to highlight the importance of predictability in retirement, the release said. The narrator’s language is “clear and calming,” and focuses on “simplicity and transparency,” and uses a “striking teal and green color palette.”

BBH NY was the lead agency on the Brighthouse Financial launch; and developed a fully integrated campaign across television, print, out-of-home, social media and CRM; Citizen, which created the Brighthouse Financial website and designed user experiences; MODCo Media, which developed the multi-channel media plan; MXM, which created content for the website; Red Peak, which worked on the logo and the visual design system; and cg42, which develop target audience research, brand strategy and positioning.

More than 58% of the 2,772 respondents to Jackson National Life’s 2017 Investor Education Survey said they do not feel confident enough to make appropriate investing decisions. That was a slight improvement over last year’s results, when 60% said the same, according to a release this week.

Life/health industry’s net income off 3.1% in 2016

Even though the U.S. life/health (L/H) industry enjoyed a 22.8% year-over-year increase in pretax net operating income to $66.2 billion in 2016, a five-year high, its net income was driven down 3.1% year-over-year to $38.8 billion due to realized capital losses of $11.2 billion, compared with $3.3 billion in losses in 2015.

Total income for the L/H industry in 2016 was $842.2 billion, virtually flat compared with 2015.

That’s according to a new Best’s Special Report, titled, “A.M. Best First Look– 4Qtr 2016 U.S. Life/Health Financial Results.” The data is derived from companies’ statutory statements that were received as of March 28, 2017. The results represent approximately 97% of the total U.S. L/H industry’s premiums and annuity considerations.

Despite the decline in net income, capital and surplus for the L/H industry reached a record $378.7 billion as of year-end 2016. A significant improvement in unrealized gains, increased contributed capital and a boost in other surplus gains more than offset the change in asset valuation reserve and the 31% increase in stockholder dividends.

The L/H industry saw continued growth in invested assets, reaching a record $3.9 trillion as of year-end 2016. The proportion of invested assets allocated to bonds declined slightly with new money allocations increasing exposure to commercial mortgage loans and other invested assets.

In addition, within the fixed income portfolio, interest in private placements, NAIC-2 rated bonds, and structured securities—particularly collateralized loan obligations (CLOs)—continues to increase.

Many investors have “no interest” in their finances: Jackson National

Almost a third of respondents (30%) said they “have no interest in this area,” up from 26 percent last year. Dan Martin, director of digital communications and strategy for Jackson, noted however that 70% of those surveyed expressed interest in financial education.

Survey highlights included:

48% chose “honesty” as the most important attribute for an advisor and 26% chose “level of financial and investment knowledge.”
28% said “having a financial professional who really ‘gets’ me” would make the biggest difference in their financial outlook.
43% of respondents prefer to receive financial/investing education primarily from their advisor, while 31% use web-based resources to obtain the information they need.
47% of respondents rate “saving enough money for retirement” as their top financial concern down from 57% in 2016, but still the highest percentage out of all responses.
26% of investors said “having easier-to-understand and more transparent investment products and literature from companies to help ‘do-it-yourselfers’ like me” would have the biggest positive impact on their financial outlook.
Almost 35% of individuals who work with a financial professional expressed a complete lack of interest in taking ownership of their financial/investing education, saying “that’s what my advisor is for.”

The 2017 Jackson Investor Education Survey gauged the opinions of non-retired U.S. investors with more than $75,000 in investable assets on key topics relating to retirement and investing/financial education, knowledge and confidence. The survey was published by the Center for Financial Insight, Jackson’s online resource designed to raise the level of financial education and confidence in the U.S.

Auto-enrollment promotes debt as well as savings, study shows

Posted on March 30, 2017 by Editorial Staff -

Has auto-enrollment been successful in raising the financial wellness of the participants who are at greatest risk of not saving enough for retirement? A decade after the Pension Protection Act began allowing plan sponsor to “nudge” employees into defined-contribution plans, the answer appears to be yes—but with an asterisk.

According to an unpublished research paper, auto-enrollment may also be driving them deeper into debt. Low-income workers could be living so close to subsistence that DC participation may be a mixed blessing. An increase in debt appears to offset as much as 73% of the gains of low-income participants, the research showed.

The researchers analysed savings data on civilian employees of the U.S. Army who contributed to the federal defined-contribution Thrift Savings Plan. Automatic enrollment into the plan was associated with an increase inbut the average wealth of participants, more than a third of the average gain was offset by new consumer debt.

The authors compared the 32,088 civilian U.S. Army employees hired in the year prior to the implementation of auto-enrollment change with the 26,826 employees hired in the year after. The researchers also studied 2,345 employees hired in the month prior to the implementation to the 3,414 hired in the month after the change and got similar results.

During a four-year period after they were hired, auto-enrolled employees saw their wealth go up (as a result of employer and employee contributions, and as a percentage of their first-year salaries) by 5.2% on average, by 13.9% at the 25th percentile of income, and by 21.5% at the 10th percentile of income, the study showed. Auto-enrollment had no effect at the 75th and 90th percentiles.

But, when the employees’ new assumption of installment and credit card debt was factored in, automatic enrollment increased net wealth over the same period by an average of only 3.3% (a 37% “crowding out” effect), by 8.6% (38% crowd-out) at the 25th percentile, and by 5.8% (73% crowd-out) at the 10th percentile. There was no effect on net wealth at the 75th and 90th percentiles.

Brigitte Madrian, David Laibson and John Beshears of Harvard, James Choi of Yale, and William Skimmyhorn of the U.S. Military Academy were the authors of the study. Several of the authors have as a team been studying behavioral efforts to lift U.S. savings rates for a decade or more.

Sales of non-variable fixed annuities neared $100 billion in 2016: Wink’s

Posted on March 30, 2017 by Editorial Staff -

Total fourth quarter non-variable deferred annuity sales were $21.0 billion; down nearly 8% from the prior quarter, and down almost 14% from the same period a year prior, according to Wink’s Sales & Market Report for the fourth quarter of 2016. Overall non-variable deferred annuity sales for 2016 were $96.9 billion.

Since 2015, the Wink report has included all non-variable deferred annuities, including indexed annuities, traditional fixed annuities, and multi-year guaranteed annuities (MYGA) product lines.

Allianz Life was the top seller of non-variable deferred annuity sales in the fourth quarter with a market share of 9.1%, followed by Athene USA, American Equity Companies, New York Life, and AIG. Allianz Life’s Allianz 222 Annuity indexed annuity was the top selling non-variable deferred annuity.

“Indexed annuity sales for 2016 were $58 billion. That tops last year’s record by nearly 10%” said Sheryl J. Moore, president and CEO of both Moore Market Intelligence and Wink, Inc., in a press release. “Although the market stopped short of $60 billion in sales, this is still an impressive feat considering the Department of Labor’s pending Fiduciary Rule.”

In the indexed annuity category, Allianz Life was the top seller with a market share of 14.3%, followed by Athene USA, American Equity Companies, Great American Insurance Group, and AIG. The Allianz 222 Annuity was the overall best-selling indexed annuity for the tenth consecutive quarter.

Sales of traditional fixed annuity in the fourth quarter of last year were just over $1 billion, declining more than 16% from the third quarter of 2016 and down over 63% from the fourth quarter of 2015.

With a 14% market share, the top seller of fixed annuities was Jackson National Life, followed by MetLife (dba Brighthouse Financial), Great American Insurance Group, Reliance Standard, and Global Atlantic Financial Group. Forethought Life’s ForeCare Fixed Annuity was the top-selling fixed annuity for the quarter.

MYGA sales for the fourth quarter were $6.6 billion; down more than 8% from the previous quarter but up more than 12% over the same period last year.

New York Life was top seller of MYG annuities, with a market share of 19.4%, followed by Global Atlantic Financial Group, Security Benefit Life, and Symetra Financial. Security Benefit’s Life RateTrack 5-Year was the top-selling multi-year guaranteed annuity for the quarter.

Fifty-five indexed annuity providers, 48 fixed annuity providers, and 55 MYGA companies participated in the 78th edition of Wink’s Sales & Market Report for 4th Quarter, 2016.

Transamerica hires Salesforce’s “Einstein” to make distribution smarter

Posted on March 30, 2017 by Editorial Staff -

Driven by competitive, technological and regulatory force, the automation of traditional insurance and investment distribution networks is now reaching big financial services companies long hobbled by a patchwork of legacy systems.

This week, Transamerica Financial Network (TFN), Transamerica’s North American distribution channel, announced that it will use Salesforce Financial Services’ “Cloud Einstein” technology to link Transamerica’s investment advisors, insurance agents and some 27 million customers on Salesforce’s Intelligent Customer Success service platform.

In a release, Salesforce described Einstein as “powered by advanced machine learning, deep learning, predictive analytics, natural language processing and smart data discovery.”

In the past, TFN’s advisors and agents provided multi-carrier insurance and investment solutions across multiple customer systems, creating “disjointed retail customer experiences.” TFN wanted a new system that could serve customers over time, allow advisor and agents to provide “differentiated” customer experiences, and provide the documentation required to comply with the Department of Labor’s 2016 fiduciary rule and its “best interest” standard of conduct.

With consulting services from Deloitte, Salesforce is now rolling out Financial Services Cloud Einstein, Salesforce Shield, Community Cloud and Marketing Cloud to TFN offices and agents in the United States and Canada, and soon to other countries around the world, the release said.

TFN will use “Cloud Einstein’s intelligence and machine-learning capabilities to better understand and predict customer behaviors,” the release said. For instance, if a client makes multiple inquiries into the status of her accounts or movements of funds, the system will warn her advisor or agent that the customer might be planning to take their investments elsewhere, and reach out to the client.

“Einstein will also help advisors better understand broader household needs and provide services that extend beyond each individual customer,” the release said.

According to Salesforce, its Einstein technology “democratizes AI with state-of-the-art algorithms built directly into the Salesforce Intelligent Customer Success Platform and is delivered through the apps and workflows that millions of CRM users rely on every day.” Integrating the masses of data currently scattered among many silos at TFN, Einstein allows advisors to:

Automatically see if a client mentions a competitor in an email thread and — when coupled with a decrease in communications — receive a reminder to reach out and nurture the relationship.
Connect information about clients and their households in one place, and edit their existing roles and activities. For example, an advisor can easily add when a client has taken on a new role such as becoming a board member at a company.
Track when their clients take on new responsibilities within other households, such as becoming a power of attorney for an aging parent, and then proactively reach out with personalized advice.
Discover that a client has become the beneficiary of a trust that is in need of estate-planning services.

Genworth’s medically underwritten income annuity now quoted on CANNEX

Posted on March 30, 2017 by Editorial Staff -

Pricing and benefits information for Genworth Life’s medically underwritten “Income Assurance Immediate Need Annuity” is now available to financial advisors and insurance agents at the CANNEX Income Annuity Exchange, it was reported this week.

Genworth introduced the Income Assurance Immediate Need Annuity, a medically underwritten (or “impaired”) single premium immediate annuity, in 2016. This type of annuity contract offers higher monthly payments than a traditional immediate annuity if the beneficiary has a certifiable health condition that shortens his or her life expectancy. The annuity income can be applied to any expense, not just medical expenses.

The CANNEX quote process “allows us to provide financial professionals with monthly payment estimates based on a set of adverse health conditions at different ages, before moving forward with the underwriting process to obtain the final guaranteed income,” said Jerry Larkin, Genworth national sales manager, in a release.

The CANNEX Annuity Exchange is used by more than 400 financial institutions and supports over 500,000 financial advisors and consultants across North America. In addition to income annuities in the U.S., the platform also supports the evaluation and comparison of other guaranteed lifetime income products including variable annuities, indexed Annuities, and fixed rate annuities.

Survivor Funds: Not for the Faint of Heart

Posted on March 29, 2017 by Jonathan B. Forman and Michael J. Sabin -

In the reality television show Survivor, contestants are stranded in a remote location, and the sole “survivor” of a series of tasks wins a million-dollar prize. With what we call “survivor funds,” retirees could enjoy significantly higher returns—but no more investment risk—than they can get on today’s 10-year Treasury bonds.

Of course, there’s a catch. But it’s a catch that most retirees could “live” with: You need to be alive at the end of the term of the survivor fund, or you get nothing. That is, with a survivor fund, you will get a bonus if you live until the end of a relatively short investment period. If you die before then, you will get nothing.

But who cares? Although you’d receive zero on that particular investment, your need for income would be over.

Here is a simple example that shows how a survivor fund works, relative to an ordinary investment fund:

First, imagine a fund where ten 65-year-old men each invests $8,000 in a pool that buys 10-year Treasuries. At the current Treasury interest rate of 2.3% a year, that $80,000 investment would grow to $100,000 in 10 years, and each man—or his heirs—would get $10,000, reflecting that pitiful 2.3% yield.

But what if we created a pool that divided the $100,000 only among the men who survived ten years to age 75? According to the Social Security Administration, the typical 65-year-old man has an 80% chance of living to age 75. So, probably, just eight of our ten men will live to 75.

With a survivor fund, those eight survivors will divide the $100,000, and the two men who died will get nothing. In short, each of the eight survivors will get $12,500 on his $8,000 investment, and that works out to be a 4.6% yield. That’s double the 2.3% yield on the underlying Treasuries. (We chose “men” for our example only because a single-gender group has a more definable life expectancy than a group of men and women.)

In a recent law review article, we show how a new class of hypothetical savings products, called Survivor Funds, would use the survivor principle to benefit multiple investors. Each time an investor died, his account balance would be divided among the survivors. Survivor funds would be attractive investments because the survivors would get a greater return on their investments, while the decedents, because they no longer have longevity risk, would not care. (At right: Jonathan Forman)

In our example, instead of earning a measly 2.3% interest on a 10-year Treasury, our 75-year-old survivors get 4.6% (2.3 percentage points more). The bump from a survivor fund is not always that large, but as long as some investors in a survivor fund die, the rest will always get a higher return than they could get from the underlying investment. And even if no other investors die, the survivors will never get less than the return on the underlying investment.

Returns should be even higher if a survivor fund invests in stocks instead of bonds. For example, if our hypothetical survivor fund had instead invested in a Standard & Poor’s 500 Index fund that earned say 7%, the survivors would get 9.4%. If that S&P500 Index fund earned 10%, the survivors would get 12.5%.

Historically, such last-survivor-takes-all games were called “tontines”—after the 17th century Italian banker Lorenzo de Tonti who came up with the survivor principle—that the share of each, at death, is enjoyed by the survivors. (At right: Michael Sabin)

In a simple tontine, investors contribute equally to buy a portfolio of investments that is awarded entirely to the last surviving investor; and it can make for some great fiction. For the erudite, there is Robert Louis Stevenson’s 1889 book The Wrong Box. For the rest of us, there is the 1966 movie of the same name, starring Michael Caine.

There was also a 1980 episode of the popular television series M*A*S*H, in which Colonel Sherman T. Potter, as the last survivor of his World War I unit, got to open the bottle of cognac that he and his fellow doughboys brought back from France (and share it with his Korean War buddies). Even the Simpsons had an episode that involved a survivor-take-all tontine (in 1996).

But the survivor principle—that the share of each, at death, is enjoyed by the survivors—can be used to design financial products that benefit multiple survivors, not just the last survivor. For example, in the 17th and 18th centuries, European governments sometimes used variations on the simple tontine to raise money. And in our earlier research, we have shown how the survivor principle could be used to create “tontine annuities” and “tontine pensions” that would benefit lots of retirees.

Admittedly, there are no survivor funds out there today. After all, our survivor-fund idea is brand new. But there should be survivor funds soon. Lots of retirees want higher returns on their investments, and we think that investment companies could create survivor funds fairly easily.

Squaring such products with existing regulations would require time and effort, as one of the authors acknowledged in a recent New York Times article. State insurance laws and gambling laws might be obstacles, and issuers of the funds would probably want more certainty about the federal tax laws as well. But the problems aren’t insurmountable.

Our law review article focused on how to create those survivor funds—and how they should be regulated. As we envision it, survivor funds could easily accommodate thousands of investors of varying ages and investment levels. Administrative fees would be quite low, and the returns for survivors would be high; and that is exactly what today’s retirees want.

The origins of Wall Street investing date back to around 1793 when the Tontine Coffee House was established there as a meeting place for stockbrokers. We think survivor funds will also find a new home on Wall Street—with today’s investment companies and mutual-fund houses.

Jonathan Barry Forman is the Alfred P. Murrah professor of law at the University of Oklahoma, Norman, and Dr. Michael J. Sabin is an independent consultant in Sunnyvale, California. They are the authors of Survivor Funds, 37(1) Pace Law Review —204-291 (2016).

The Risks to America’s Booming Economy

Posted on March 29, 2017 by Martin Feldstein -

After a long and slow recovery from the recession that began a decade ago, the United States economy is now booming. The labor market is at full employment, the inflation rate is rising, and households are optimistic. Manufacturing firms and homebuilders are benefiting from increasing activity. The economy is poised for stronger growth in the year ahead. We no longer hear worries about secular stagnation.

The overall unemployment rate is just 4.7%, while unemployment among college graduates is only 2.4%. Average hourly earnings are 2.8% higher than they were a year ago. The tight labor market and rising wages are inducing some individuals who had stopped looking for work to return to the labor force, boosting the participation rate.

A clear indication that the economy is at full employment is that the rate of inflation is increasing. The “core” consumer price index (which omits volatile energy and food prices) has reached an annual rate of 2.2%, substantially higher than the 1.8% average during the previous three years. During the most recent three months, core inflation rose at a 2.8% annual rate.

Household wealth is also increasing. The price of homes, the most important asset for US households, rose by 5% during the most recent 12 months. The rising stock market has caused the broader measure of net worth to increase even faster.

Surveys of consumer attitudes point to strong positive feelings. The University of Michigan Consumer Sentiment Index recently reached a 17-year high. Likewise, the Conference Board Consumer Confidence Index hit a 15-year high in February.

Manufacturing firms have increased output in each of the last six months. Homebuilders are racing to keep up with demand, reflected in an increase of more than 6% in the number of new single-family houses in the past 12 months.

All of this suggests that real (inflation-adjusted) GDP will rise more quickly in 2017 than it did in the recent past. While volatile trade and inventory numbers have depressed the recent GDP figures, the more fundamental measure of final sales to private purchasers has been rising in real terms at an annual rate of about 2.5%. Overall GDP is likely to increase at a similar rate for 2017 as a whole.

But, although the economy currently is healthy, it is also fragile. The US has experienced a decade of excessively low interest rates, which have caused investors and lenders to seek higher yields by bidding up the prices of all types of assets and making risky loans. The danger is that overpriced assets and high-risk loans could lose value and cause an economic downturn.

The price-earnings ratio of the Standard & Poor’s 500 Index is now nearly 70% above its historic average. A return of the price-earnings ratio to its historic average would cause share prices to decline by 40%, implying a loss of more than $9 trillion, an amount equal to nearly half of total GDP.

Ten-year Treasury bonds now yield just 2.5%. With the current inflation rate of more than 2% and markets anticipating a similar inflation rate over the longer term (as measured by five-year five-year-forward inflation expectations), the yield on ten-year Treasury bonds should be above 4%. A rise of the ten-year yield to 4% would reduce the value of those bonds substantially. Other long-term bonds—both government bonds and corporate bonds—would suffer similar declines.

Reaching for yield has also narrowed credit spreads between high‐grade bonds and riskier domestic and emerging‐market bonds. And commercial real‐estate prices have been bid up to levels that are probably not sustainable.

At the same time, banks and other lenders have extended loans bearing interest rates that do not reflect the riskiness of the borrowers. And, because these covenant‐light loans impose fewer conditions on the borrowers, they are more susceptible to default if economic conditions deteriorate.

But a bad outcome is not inevitable. None of the risks I have described may materialize. Interest rates may return to normal levels, and asset prices may gradually correct. But there is a clear risk that a decade of excessively low interest rates will cause a collapse of asset prices and an economic downturn. This will be a major challenge to the US Federal Reserve and the Trump administration in the year ahead.

Martin Feldstein is a professor of economics at Harvard University and president emeritus of the National Bureau of Economic Research.

Leaks in the Bucket Method

Posted on March 29, 2017 by Kerry Pechter -

As a tool for retirement income planning, time segmentation offers something for almost everyone. Combining elements of behavioral finance with asset-liability matching and a dash of equity premium, time segmentation—aka bucketing—is broad enough and flexible enough to satisfy the needs of many different types of advisors and clients. It’s very popular.

If you’re not familiar with bucketing, it’s the practice of dividing an individual’s or couple’s retirement years into as many as six discreet time segments and designating a specific bucket of assets—an annuity, a bond ladder, an equity portfolio—as the current or future source of income in that segment. It breaks a big problem into manageable tranches.

Time segmentation has critics (mostly in academia). They’ve belittled it as a form of mental accounting that offers at best a thin sense of financial security, questioned its assumption that stocks pay off “in the long run,” and warned that transitions between buckets will be fraught with timing risk and sequence risk. The jury is still out.

The judge, however, is in. Wade Pfau, Ph.D., the eminent economist, professor and retirement specialist at The American College, examines the practice of bucketing in a new three-part series in the online publication AdvisorPerspectives.com. In the first article, which appeared this week, he puts bucketing into historical perspective and reviews its strengths and limitations. In future articles, he intends to dig deeper.

Hazards of bucketing

The concept of bucketing has always appealed to me. When I write articles, I use a five-bucket outlining method. One of the first people I met in the retirement business was David Macchia,whose Income for Life Model began as a bucketing solution but has since moved passed bucketing to embrace a hybrid solution that includes lifetime guaranted income. I entered this field via the annuity world, and annuities are easy to plug into a time-segmentation model. So RIJ is a bucket-friendly zone.

Pfau’s article raised my awareness of the hidden wrinkles of bucketing. He offers fresh analysis of the conflicts or tensions that bucketing might pose for advisors. For instance, he points out that bucketing can frustrate advisors who want to maintain a specific asset allocation and risk exposure. He acknowledges the sequence risk that can occur during transitions between buckets. After reading his article, I came to a few new conclusions about bucketing:

Reserves shouldn’t be risky, so using stocks for the final bucket may not be wise. A deferred income annuity strikes me as a more appropriate income provider in the last bucket than stocks. That runs counter to bucketing orthodoxy, but the more I think about it, the more sense it makes.

In standard bucketing, you put equities into the final bucket, the one that you tap last, or whose appreciation you occasionally take off the table and put into an earlier bucket. Equities certainly belong in a retirement portfolio, to protect against inflation or provide a bequest whose basis steps up. They satisfy a universal yen for upside; retirees don’t like to feel that they’re making a “dead-stick landing” to eternity.

But if a retiree wants to reduce longevity risk with the final bucket, equities don’t fill the bill. They carry market risk, which could potentially make longevity risk worse instead of making it go away. Pfau observes that people who have not saved enough may want to hold equities as a long-term catch-up strategy. That’s risky. Banks don’t hold equities as their reserves; why should retirees hold equities as their reserves?

For retirees who have under-saved, I think it makes more sense to rely on the mortality credits of a DIA (or, for tax-deferred savings, a qualified longevity annuity contract) rather on than the uncertain equity premium when assigning assets to the final bucket.

Retirees want simplicity, so advisors shouldn’t make their finances complicated.

Pfau’s article leaves the impression that the bucket method, if practiced with appropriate zeal, is likely to be labor-intensive for the advisor and perhaps fee-intensive for the client.

For instance, the more buckets there are in the plan, the more transitions there are between buckets. A transition might involve the exhaustion of one bucket and the liquidation of the next. Or it might involve the periodic refilling of a near-term bucket via sales of bonds or equities. Either way, transitions imply timing risk. To ensure that assets don’t need to be sold at unfavorable times or at unfavorable prices, advisors will have to monitor the portfolio closely.

A floor-and-upside income generation method seems more manageable. As flooring material, income-producing annuities would be easier than bond ladders. Manufacturing and distribution costs raise the price of income annuities by an estimated 15% above actuarial value, but they offer simplicity and peace of mind.

Bucketing isn’t necessarily for everyone, and advisors should assess their clients’ financial situations before choosing an income generation method. Academic comparisons between bucketing and total return investing or a floor-and-upside approach imply that the method is the priority, and that the best method is the one that produces the highest return, income rate, or final balance, according to Monte Carlo simulations. I would argue that that’s not necessarily client-centric.

The most logical first step in retirement planning might be to determine the client’s funding level. Canadian advisor Jim Otar assigns clients to a “green,” “orange” or “red” zone. Clients in the green zone have lots of money relative to their income needs; they can choose almost any income style they want. A total return method would be simpler than bucketing. Tax-efficient distributions may be their highest priority.

Clients in the red zone by definition have too little money relative to their income needs. Dangerously vulnerable to sequence risk, market risk or longevity risk, Otar wrote, red zoners typically need to transfer one or more of those risks to an insurance company through the purchase of annuities.

Clients in the orange zone pose the most interesting challenges for retirement income specialists. Orange zoners usually have a limited risk budget, which they can spend on a variety of combinations of risky and risk-free assets. Bucketing might suit them well. Bear in mind that clients can move to a better-funded zone simply by reducing their expenses. Bottom line: Clients’ funding levels help determine their income generation methods.

Stay tuned

Pfau frames bucketing as a compromise between the probabilistic (risky) total return approach and the deterministic (low-risk) floor-and-upside approach. He promises in the second part of his series (published today) to examine a hypothetical time-segmentation strategy that combines a bond ladder (using techniques described by Brent Burns and Stephen Huxley in their 2004 book, Asset Dedication) with equity investments. “Part 2 will formalize three different rules for how to implement time segmentation in practice,” Pfau wrote. “Part 3 will then compare time segmentation approaches to total-return investing strategies to determine whether it is a superior investing strategy.” I look forward to reading both.

Fixed Annuities Outsold Variable in 2016: LIMRA SRI

Posted on March 22, 2017 by Editorial Staff -

Despite a fourth quarter stumble, total fixed annuity sales reached $117.4 billion in 2016, a new record. Sales were 14% above 2015 levels and nearly $7 billion higher than the previous peak in 2009, according to LIMRA Secure Retirement Institute’s Fourth Quarter U.S. Annuity Sales survey.

Overall, 2016 was a good year for every type of annuity except variable, whose sales dropped 21%, to $104.7 billion from $133 billion. Fixed indexed annuity (FIA) sales hit record levels in 2016, up 12% to $60.9 billion, a record. Fixed-rate deferred product sales reached $38.7 billion, up 25% from 2015. DIA sales increased 4% to $2.8 billion in 2016.

Because of the softening in variable annuities, which represent such a large part of the market, total annuity sales fell 6% to $222.1 billion. In 2008, total sales were $265 billion.

The top five sellers of variable annuities were Jackson National Life ($18.6 billion), TIAA ($13.0 billion), AXA US ($10.4 billion), Prudential Annuities ($7.98 billion) and AIG Companies ($7.86 billion).

The top five sellers of fixed annuities were Allianz Life ($10.2 billion), New York Life ($9.95 billion), AIG Companies ($9.26 billion), American Equity Investment Life ($7.13 billion), and Athene Annuity & Life ($5.3 billion).

Since the end of 2008, VA sales have fallen by about one-third, or about $51 billion. While Jackson National’s VA sales have risen to $17.2 billion from $6.5 billion over that time, three major issuers in 2008—ING, John Hancock and Hartford—have all vanished from the top 20.

MetLife’s annual VA sales have dropped to $4.3 billion in 2016 from $13.9 billion in 2008 and Lincoln Financial’s to $6.7 billion last year from $11.1 billion eight years ago. TIAA, AXA US (previously AXA Equitable), AIG Companies, Lincoln Financial, Nationwide and Prudential Annuities were all among the top 10 variable annuity issuers in both 2008 and 2016.

Year-end fade

The final quarter of 2016 was a bloodbath for annuities. Overall, fixed annuity sales fell 13% to $25.7 billion, after strong results in the first three quarters. Fixed indexed annuity sales were down 13%, to $14.0 billion from $16.1 billion. Sales of fixed-rate deferred annuities, (Book Value and MVA) fell 9%, to $7.7 billion. Variable annuity sales totaled $25.3 billion in the fourth quarter, down 20% from the same quarter in 2015.

Income annuity sales also suffered in the fourth quarter. Despite the 85 basis point jump in the 10-year Treasury interest rate, fixed immediate annuity sales fell 23% in the fourth quarter to $2.0 billion. Deferred income annuity (DIA) sales fell 30% to $575 million.

Overall annuity sales declined for the third consecutive quarter and recorded the lowest quarterly sales since the first quarter 2002—$51.0 billion in the fourth quarter, down 17% year over year.

“Unlike the last several years where indexed annuities propelled overall fixed annuity growth, in 2016, fixed-rate deferred was the primary driver of fixed sales in 2016,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute.

“A large block of fixed-rate deferred annuities purchased in 2009 came due in the first half of the year, creating a significant amount of money in motion.” The Institute expects sales to rebound in the first quarter 2017, responding to the post election interest rate spike late in 2016.

Waiting for yields

“This marks the ninth consecutive year of growth for FIAs,” noted Giesing. “We have noticed FIA sales have declined quarter over quarter since the Department of Labor (DOL) reclassified FIAs under the best interest contract exemption (BICE). Until there is some clarity on the DOL fiduciary rule, the Institute expects sales to continue to drop in 2017.”

“Until yields come up, consumers are going to resist giving up liquidity for the guaranteed income offered through income annuities,” said Giesing. “That said, demographics are in our favor, we expect slow steady growth in the income annuity market.”

Great American, Allianz Life and Lincoln Financial have begun wholesaling no-commission FIAs for brokers and agents who switched to a fee-based advisory model to avoid the impact of the BICE. But, even if the Obama fiduciary rule remains intact and in effect, they may not prove as popular as commission-paying products.

Advisors may find it difficult to levy a full advisory fee on assets that are in a packaged product. “I’m not sure how you can justify charging a management fee on a fixed annuity that typically has one time per year that you can change or modify the index option choices,” said Stan Haithcock, who is known professionally as “Stan the Annuity Man.’

“First of all, FIAs are fixed annuities, so the advisor is not managing risk. Secondly, the index option choices were designed in 1995 to compete with CD returns, and that is how they have historically performed. The caps and spreads—the upside limitations—are a little higher with these fee-based FIAs, but not as high as I expected with all of the commissions stripped out. I do not see these fee-based FIAs catching on with the advisors, who are the ones needed to push the strategy out to the consumer.”

Variable annuities’ long slide

VA sales have been below $30 billion every quarter of 2016 and have seen yearly sales declines for five consecutive years. VA sales are nearly $80 billion lower than their peak in 2007 and are at their lowest level since 1998.

“Aside from the DOL fiduciary rule, one of the factors driving VA sales declines has been a drop in sales of products with guaranteed living benefit riders,” noted Giesing. “LIMRA Secure Retirement Institute is expecting sales of variable annuities with a GLB rider to be around $50 billion in 2016. This is a decrease of nearly $20 billion from last year, and a drop of over 50% from just five years ago.”

LIMRA Secure Retirement Institute’s fourth quarter U.S. Individual Annuities Sales Survey represents data from 96% of the market.

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