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Getting Basic Income Right

Posted on March 22, 2017 by Kemal Dervis -

Universal basic income (UBI) schemes are getting a lot of attention these days. Of course, the idea—to provide all legal residents of a country a standard sum of cash unconnected to work—is not new. The philosopher Thomas More advocated it back in the sixteenth century, and many others, including Milton Friedman on the right and John Kenneth Galbraith on the left, have promoted variants of it over the years. But the idea has lately been gaining much more traction, with some regarding it as a solution to today’s technology‐driven economic disruptions. Can it work?

The appeal of a UBI is rooted in three key features: it provides a basic social “floor” to all citizens; it lets people choose how to use that support; and it could help to streamline the bureaucracy on which many social‐support programs depend. A UBI would also be totally “portable,” thereby helping citizens who change jobs frequently, cannot depend on a long‐ term employer for social insurance, or are self‐employed.

Viewing a UBI as a straightforward means to limit poverty, many on the left have made it part of their program. Many libertarians like the concept, because it enables – indeed, requires – recipients to choose freely how to spend the money. Even very wealthy people sometimes support it, because it would enable them to go to bed knowing that their taxes had finally and efficiently eradicated extreme poverty.

The UBI concept also appeals to those who focus on how economic development can replace at least some of the in‐kind aid that is now given to the poor. Already, various local social programs in Latin America contain elements of the UBI idea, though they are targeted at the poor and usually conditional on certain behavior, such as having children regularly attend school.

But implementing a full‐blown UBI would be difficult, not least because it would require answering a number of complex questions about goals and priorities. Perhaps the most obvious balancing act relates to how much money is actually delivered to each citizen (or legal resident).

In the United States and Europe, a UBI of, say, $2,000 per year would not do much, except perhaps alleviate the most extreme poverty, even if it was added to existing social‐welfare programs. An UBI of $10,000 would make a real difference; but, depending on how many people qualify, that could cost as much as 10% or 15% of GDP—a huge fiscal outlay, particularly if it came on top of existing social programs.

Even with a significant increase in tax revenue, such a high basic income would have to be packaged with gradual reductions in some existing public spending—for example, on unemployment benefits, education, health, transportation, and housing—to be fiscally feasible. The system that would ultimately take shape would depend on how these components were balanced.

In today’s labor market, which is being transformed by digital technologies, one of the most important features of a UBI is portability. Indeed, to insist on greater labor‐market flexibility, without ensuring that workers, who face a constant need to adapt to technological disruptions, can rely on continuous social‐safety nets, is to advocate a lopsided world in which employers have all the flexibility and employees have very little.

Making modern labor markets flexible for employers and employees alike would require a UBI’s essential features, like portability and free choice. But only the most extreme libertarian would argue that the money should be handed out without any policy guidance. It would be more advisable to create a complementary active social policy that guides, to some extent, the use of the benefits.

Here, a proposal that has emerged in France is a step in the right direction. The idea is to endow each citizen with a personal social account containing partly redeemable “points.” Such accounts would work something like a savings account, with their owners augmenting a substantial public contribution to them by working, studying, or performing certain types of national service. The accounts could be drawn upon in times of need, particularly for training and re‐skilling, though the amount that could be withdrawn would be guided by predetermined “prices” and limited to a certain amount in a given period of time.

The approach seems like a good compromise between portability and personal choice, on the one hand, and sufficient social‐policy guidance, on the other. It contains elements of both US social security and individual retirement accounts, while reflecting a commitment to training and re-skilling. Such a program could be combined with a more flexible retirement system, and thus developed into a modern and comprehensive social‐solidarity system.

The challenge now—for the developed economies, at least—is to develop stronger and more streamlined social‐solidarity systems, create room for more individual choice in the use of benefits, and make benefits portable. Only by striking the right balance between individual choice and social‐policy guidance can modern economies build the social‐safety programs they need.

Assets flowed to fixed income and passive equity funds in February

Posted on March 22, 2017 by Editorial Staff -

In February, investors put $29.1 billion into U.S. equity passive funds, down from $30.6 billion in January 2017. On the active side, investors pulled $8.9 billion out of U.S. equity funds during the month.

Total inflows to U.S. equity funds, both active and passive, doubled since January, according to Morningstar’s February asset flow report.

Highlights from Morningstar’s report:

Investors continue to contribute to fixed income, adding $35.5 billion in estimated net flows.
The MSCI EAFE Index rose 1.4% in February, signaling modest growth in developed international markets.
International-equity funds enjoyed $14.7 billion in new flows, with passive making up the majority at $13.6 billion.
All category groups except allocation enjoyed positive flows in February, showing optimism about the U.S. market.
U.S. equity has been in positive-flow territory for four consecutive months, a feat not witnessed since late 2014.
Morningstar Category trends for February continue to show large- and mid-cap blend in the top five in terms of inflows.
Intermediate-term bond was in the top spot, with inflows of $6.2 billion to active and $6.0 billion flowing into passive.
Among top U.S. fund families, T. Rowe Price, American Funds, and PIMCO had modest inflows on the active side in February, with $1.7 billion, $1.5 billion, and $1.2 billion, respectively.
Vanguard and iShares continued to dominate on the passive side, garnering $29.8 billion and $16.7 billion, respectively.
Among active funds, PIMCO Income, which has a Morningstar Analyst Rating of Silver, attracted the largest inflows of $2.0 billion. Bronze-rated PIMCO Total Return continued to place in the bottom five despite good returns, with outflows of $1.0 billion in February.
Active fund Vanguard Institutional Short-Term Bond had the worst outflows of all active funds in February, at $1.6 billion.
In the passive arena, iShares saw three of its funds land in the bottom five: iShares Russell 2000, iShares iBoxx $ High Yield Corporate Bond, and iShares MSCI Japan, with $1.6 billion, $397.0 million, and $347.0 million in outflows, respectively.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETFs by computing the change in shares outstanding.

T. Rowe Price launches its version of a hybrid robo-advisory solution

Posted on March 22, 2017 by Editorial Staff -

Under T. Rowe Price’s new “ActivePlus Portfolios” program, IRA investors can receive the firm’s asset allocation expertise, rebalancing, and advice with no additional advisory fee. Investors pay only the expense ratio of the underlying funds in the portfolio.

The Baltimore-based no-load fund giant and 401(k) provider announced the program this week, calling it a “digital discretionary investment and advisor solution designed for investors who want access to actively managed funds.” BNY Mellon’s Pershing will serve as the broker-dealer for the accounts.

The ActivePlus Portfolios program is available at the initial launch for individual retirement accounts (IRAs). IRA Investors with a minimum of $50,000 will receive a model portfolio recommendation after answering a short questionnaire to assess risk tolerance, time horizon, and investment goals. Each model portfolio will consist of eight to 13 of T. Rowe Price’s actively managed mutual funds.

Features of the new program include:

No advisory fees. While investors will pay the expense ratios of the funds in their model portfolio, they will not be charged an additional advisory fee or commission.
T. Rowe Price’s asset allocation expertise and model portfolios.
Aside from digital services, investors will also have phone access to licensed client managers solely dedicated to ActivePlus Portfolios clients.
Investors will have full transparency into their mutual fund holdings and trading activity within their accounts, along with access to account values, performance information and details on cash flow and market movement.

Retirees confident about retirement; workers not so much: EBRI

Posted on March 22, 2017 by Editorial Staff -

Many American workers today feel stressed about retirement but aren’t doing much about it, according to the 2017 Retirement Confidence Survey (RCS) by the Employee Benefit Research Institute (EBRI) and Greenwald & Associates.

Only 18% of workers feel very confident about retirement, while 32% of retirees feel very confident, the survey showed. Almost 80% of retirees report feeling either very or somewhat confident about affording a comfortable retirement.

Three in 10 workers report that they feel mentally or emotionally stressed about preparing for retirement, according to the research. Another 30% say they worry about their personal finances while at work. Half of the workers surveyed believe they would be more productive at work if they didn’t worry as much. Among all workers, about half say that retirement planning (52%), financial planning (49%), or healthcare planning (47%) programs would enhance their productivity.

The survey was conducted from Jan. 6, 2017, to Jan. 13, 2017, through online interviews with 1,671 individuals (1,082 workers and 589 retirees) ages 25 and older in the United States.

Many workers are not taking critical retirement-planning steps, the survey showed. For instance:

39% say they have not saved for retirement.
59% have not tried to figure out how much money they will need in retirement.
Fewer than 40% have estimated how much income they would need each month in retirement, estimated the amount of their Social Security benefit, or estimated their expenses in retirement.
The share of workers reporting that they feel either very or somewhat confident is lower than last year (60% from 64% in 2016).
Worker confidence is very close to the levels measured in 2015 (when 59% were either very or somewhat confident).

“Debt, lack of a retirement plan at work, and low savings,” are the three main contributors to low retirement confidence, said Craig Copeland, EBRI senior research associate and co-author of the report. A third of workers who feel their debt is a major problem are very or somewhat confident about retirement, compared with 78% of those who say debt is not a problem. Confidence differences are similar between those who don’t or do have a retirement plan, respectively.

Other major findings in this year’s survey include:

73% who are not currently saving for retirement say they would be at least somewhat likely to save for retirement if their employers matched their contributions.
Two-thirds of non-saving workers say they would be likely to save for retirement if their employer offered automatic paycheck deductions at either 3% or 6% of salary, with the option of changing or stopping them.
Only 54% of workers say they’re very or somewhat confident about being able to afford medical expenses in retirement (vs. 77% of retirees).
Workers are less likely than retirees to be confident that Medicare will continue providing current level of benefits (38% of workers are confident about benefits vs. 52% of retirees).

For many, marriage and lack of debt define ‘middle class’: LIMRA study

Posted on March 22, 2017 by Editorial Staff -

The 68% of consumers who identify as “middle class” feel it is getting harder to be able to live a middle class lifestyle, according to a new report from LIMRA and Maddock Douglas, a consulting firm based in Elmhurst, Illinois.

“The majority of consumers believe they are in the middle class, including 81% of those who would be categorized as upper class (as defined by Pew Research),” said Scott Kallenbach, director LIMRA Strategic Research. “There in 10 self-identified middle class consumers say they are living paycheck-to-paycheck and fewer than half believe the ‘American Dream’ is alive.”

Eight in 10 middle class consumers have concerns of becoming seriously ill. Seven in ten worry that being injured; incurring an unplanned home expense; or significant financial loss could undermine their future. Three in ten say they are living paycheck-to-paycheck and feel it is impossible for them to save for the future.

Consumers did not agree on the definition of a typical middle class lifestyle. Seven in 10 married people feel that being married is part of being a typical middle class household. While only 4 in 10 who are not married share this sentiment.

Being debt-free within 10 years is the biggest goal for the third of those surveyed who currently have debt. Among adults aged 26-34, four in 10 say they want to be debt-free within the next 10 years. Prior LIMRA research shows that 39% of Millennials have student loan debt.

Most middle class consumers dream of having a comfortable, fulfilling lifestyle in the future. Unfulfilled goals that they think would help them achieve this are: taking vacations (cited by 20%), owning a home (14%) and living a healthy lifestyle (14%).

In other findings:

30% of those surveyed said they don’t expect to retire and more than half (52%) say they plan to work for pay in retirement.
65% feel they have few options regarding their career path choices. More than eight in 10 say they could not pursue other career interests without experiencing considerable financial worry.
A third of middle class consumers are working with a financial professional.
Almost three in 10 believe they will never have enough money for a financial professional to be interested in working with them, including nearly half of those who are working in retirement and four in 10 who do not plan to retire.
26% of middle class consumers use a financial advisor/planner, 12% use an advisor from a bank and 11% use an insurance agent/broker.
One third of consumers who work with at least one financial professional feel that their advisor is not meeting all of their needs.
65% believe that budget management is the most common step that middle class consumers feel they need to take.
47% mentioned saving for retirement and 39% mentioned building an emergency fund as financial goals.

The study examined more than 2,500 consumers in the United States and Canada, ages 26-75 years old who identified themselves as ‘middle class’ and were the decision-makers in the household. The results were weighted to represent the general population.

Savings Pros Meet in City of Big Spenders

Posted on March 21, 2017 by Kerry Pechter -

Gathered around the blackjack dealers and roulette croupiers at Las Vegas casinos this week, the sort of folks you’d normally see shopping at Walmart were throwing their money down with an intensity that they really should have directed toward their 401(k) plans—assuming they have them.

Just about everyone here in Sin City seemed hellbent on spending, not saving—unless you count the 1,800 or so plan advisors and vendors holed up in the conference center at Caesar’s Palace. Attendees at the National Association of Plan Advisors 2017 Summit were less focused on shooting craps in Vegas than on the political crapshoot back in Washington, D.C., and the effect it might have on their livelihoods.

The fiduciary rule won’t disappear

Brian Graff, the CEO and chairman of the American Retirement Association (NAPA’s parent group), lobbies for this group. A former Groom Law Group attorney, his job is to plead NAPA’s case to Congress. On Monday, at the start of the conference, he confessed that political uncertainty about the fiduciary rule and tax reform keeps him in a state of “anxiety 24 hours a day.”

If you thought that plan advisors would be giddy with expectations that the Obama Department of Labor’s fiduciary rule will die after its anticipated nine-month suspension, think again.

“That’s an unlikely scenario,” Graff said in a press conference. The Trump DOL is more likely to try to surgically excise the most vexing part of the rule. That would be the so-called Best Interest Contract. It makes firms whose advisors earn third-party commissions on the sale of mutual funds, indexed annuities and variable annuities vulnerable to federal class action lawsuits—as opposed to arbitration proceedings—from groups of disgruntled IRA investors who believe that firms didn’t act in their “best interests.”

A full-blown repeal of the Obama rule isn’t expected. It’s not a huge priority for Republicans. Advisors are already moving away from the commission model and relocating small-balance clients to automated services. A few life insurers, meanwhile, have started marketing no-commission indexed annuities, though with limited success.

The rule would be difficult to undo. Even though it isn’t yet enforced, it has actually been hard-wired into the pension regulations since last June. “The [Trump] DOL can’t just issue a piece of paper making the fiduciary rule go away,” Graff (pictured below right) said. “It is the law. And it’s effective, but not applicable.”

Budget hawks eye tax deferral

Tax reform is a much bigger priority for Republicans, and that’s what most worries Graff, who is important enough a lobbyist to have been seated between Carl Icahn and a supermodel at a Trump inauguration dinner. (“Icahn had no idea 401(k) plans were such a big deal,” Graff joked. “And the model said, ‘Yeah, and I can’t even have one because I’m a contract worker.’”)

Based on bitter experience, Graff is concerned that Congressional deficit hawks will raid the $100 billion-plus annual retirement tax expenditure to help pay for tax reduction for the wealthy and new defense spending. “At this point, if they do tax reform, there’s no pathway where we get through this process unscathed,” Graff said.

During the 1986 tax reform, Congress cut the maximum 401(k) contribution to $7,000 from $30,000, he reminded listeners. Just three years ago, the House Ways and Means Committee chair, Dave Camp, suggested freezing DC plan contribution limits for 10 years and cutting the maximum deductible contribution limit in half. (The other half could be made as a contribution to a Roth account, eligible for tax-free withdrawals.)

Congress is more inclined toward a reduction in capital gains taxes, 81% of whose benefits would go to those earning $200,000 a year or more, Graff said. “Capital gains versus tax reform is the choice they are facing,” he noted, and his job “is to make this choice as difficult as possible.” He intends to remind Congress that a) 401(k) savings contribute to growth, and b) capital gains tax relief for the top 5% “won’t sell well politically.”

In truth, the benefits of tax deferral also accrue mainly to top earners. Only about half of American workers have access to a retirement plan at work at any given time, and only a fraction of participants accumulate large balances. Leakage of assets during job turnover is a big problem for middle-class Americans, many of whom lack any savings other than plan assets. Ironically, those who benefit the most from tax deferral often resent the system in retirement, when their deferred income taxes come due. In short, the $100 billion tax expenditure for retirement savings is a vulnerable, high-value target for tax reformers—more so than, say, the home mortgage interest deduction.

HSAs: A threat to 401(k)s?

Healthcare Savings Accountswere another topic of conversation in Las Vegas this week. These tax-advantaged accounts, popular with employers who hope to adopt high-deductible health insurance plans, were characterized as a threat to 401(k) plans. “People will save in the HSA first, then save in their 401(k) up to the match, and then go back to the HSA,” Graff said.

The key issue appeared to be that contributions to health savings accounts would not be invested in the plan investment options. Graff favored an integrated health and savings account, with all the assets going into the plan investments—with no harm to the all-important levels of assets under management, on which revenue is usually based.

State-sponsored mandatory auto-IRA programs

These pending programs, which aim to expand access to retirement plans to working Americans who don’t have it, have gotten the most traction in blue states. California, for instance, is close to launching its SecureChoice plan, which will require any employer without a plan to allow their employees to be auto-enrolled into target-date funds in IRAs.

Republicans have moved to deprive the plans of their exemption from regulation under federal pension law; that would re-introduce a legal complication that could discourage some states from starting their own plans. An underlying question is whether the state IRA plans might disrupt the way 401(k)s traditionally get distributed and how individual savings moves up the financial food chain. Many advisors, either as a specialty or a sideline, sell 401(k) plans to small and mid-sized businesses and, by doing so, help move large chunks of money to asset managers.

But Graff likes the mandates. They could motivate some employers to get off the fence and finally agree to sponsor a 401(k) plan, which would offer them and their workers more benefits than the auto-IRA. The National Association of Insurance and Financial Advisors (NAIFA), however, regards the state mandates as encroachment on its turf. NAIFA is lobbying hard against the state initiatives.

Only one retirement income session

Although the conference included only one break-out session on retirement income in defined contribution plans, over 100 people came to hear Kelli Hueler of the Hueler Companies and Barbara Delaney of StoneStreet Advisor Group talk about their efforts to convince plan sponsors to at least start telling participants that the point of saving in a 401(k) is to generate monthly income in retirement.

Hueler operates Income Solutions, an online rollover platform where newly retired 401(k) participants can solicit competitive bids on individual income annuities from several life insurers simultaneously. All Vanguard participants and shareholders can use her platform. Boeing is the most recent big plan sponsor to encourage its retirees to use Income Solutions.

A shout-out for DC income solutions came from an unlikely wirehouse source at the conference: Morgan Stanley’s Ed O’Connor. “I know there’s no uptake on this right now, but these products are out there. I think someone is going to crack that code,” he said. “And advisors need to keep up to speed on them. Clients won’t think to ask you about retirement income. But you can demonstrate your value by positioning yourself as the person who poses those kinds of questions to them.”

What Fee-based Indexed Annuities Reveal

Posted on March 17, 2017 by Kerry Pechter -

The Obama fiduciary rule—which may not survive—triggered the creation of retirement savings and income products that have unusually high value for consumers. Ironically, few insurance agents or financial advisors will be eager to sell or recommend them.

That product is the no-commission or fee-based version of the popular fixed indexed annuity (FIA). Before advisory fees, this type of FIA offers significantly more potential return (while also guaranteeing against principal loss) than similar FIAs in which the selling agent’s commission is embedded in the crediting rates.

Starting in the 1990s with Bob MacDonald’s LifeUSA indexed annuity business, the FIA business was built with the help of compellingly high incentives (including large commissions, vacations and other sweeteners) for independent insurance agents.

Those “Wild West” days are over, and MacDonald has long since sold LifeUSA to Allianz Life and retired to Key West. But FIA commissions are still among the highest that an agent or advisor can earn, and those incentives helped turn FIAs into the fastest-growing annuity category, with some $60 billion a year in sales. (FIA assets consist of bonds, held in the issuer’s general account, along with a dash of equity options for upside potential).

The Best Interest Contract Exemption of the Obama Department of Labor’s fiduciary rule (effective last June but now under review by the Trump DOL) targeted this highly effective business model. The rule was issued in the belief that the high incentives motivated agents to steer retirement clients toward FIAs even when the sale wasn’t suitable for the client. The rule aimed to discourage that practice by requiring agents or advisors who earned commissions from insurance companies to sign a formal pledge, called the Best Interest Contract (BIC), that committed them to acting only in their clients’ interests and not their own when selling FIAs or variable annuities (VAs) to retirement clients.

Rather than sign the BIC, which brought potential exposure to federal class action suits, many commission-based sellers of those annuities have (or are expected to) switch their compensation model to asset-based fees. To give them an FIA they can sell under that model, FIA issuers created the no-commission FIA. So far, Great American, Allianz Life and Lincoln Financial have issued such products. At least three more products are expected from other insurers.

These new FIAs can be good for investors. Because the insurance company doesn’t pay the sales intermediary an upfront 4%, 5% or even much higher commission, the contract offers the client potentially higher returns. But the client isn’t likely to capture that advantage, for two reasons. First, the advisors’ typical 1% to 1.5% fee on the annuity assets will likely consume all or most of the extra gains. Second, advisors may not recommend FIAs at all, because they no longer have the incentive of large carrier-paid commissions.

Under these circumstances, FIA sales would likely go down. Some inappropriate FIA sales would probably not occur. On the other hand, few investors would realize the benefits of fee-based FIAs. But there’s another possibility. Advisors could recommend the purchase of no-commission FIAs and split the yield advantage with the client by charging just 50 basis points on the FIA assets. Such advice would truly be in the client’s best interest and, for all the right reasons, might even stimulate sales.

The Fiduciary Rule Delay and Legal Exposure: One Law Firm’s Opinion

Posted on March 17, 2017 by Kerry Pechter -

It is possible that the delay to the Department of Labor (DOL) Fiduciary Rule applicability date will not be effective before April 10. If that were to happen, it could cause enormous confusion and noncompliance. In an effort to head off these problems, the DOL has published Field Assistance Bulletin 2017-1 (the FAB), which provides some limited temporary relief.

So, what does this mean for advisers and financial institutions? The FAB recognizes the industry’s concerns about having to comply with the Rule during a temporary “gap period,” as well as the possibility that it could find out only immediately prior to April 10 that no delay would occur.

The FAB assures advisers and financial institutions that they will not face possible DOL enforcement merely because they elect to “wait and see” what happens. The FAB makes clear that the DOL still intends to issue a final delay regulation before April 10, but it provides at least some breathing room for the industry in light of the uncertainty.

Specifically, the FAB provides that the DOL will not take enforcement action for non-compliance with the Fiduciary Rule, including its related exemptions, in two cases:

1. “Gap” Period: If the DOL decides to delay the Fiduciary Rule but the delaying regulation is not finalized until after April 10, the Fiduciary Rule would briefly become applicable during the resulting “gap period.” This would trigger fiduciary status and prohibited transactions for many advisers and financial institutions that waited for the DOL to complete the regulatory process. During the gap period (April 10 until the delay is finalized), the FAB states that DOL will not take enforcement action related to the Rule.

2. No Delay: If DOL decides to let the Fiduciary Rule become applicable on April 10 with no further delay, advisers and financial institutions would have a “reasonable period” after that decision is announced to begin complying with the Rule. Further, the FAB states that the “Transition Period” disclosures required under the Best Interest Contract Exemption (BICE) and the DOL’s exemption for principal transactions could be provided during the 30-day “cure period” that these two exemptions recognize where disclosures are inadvertently omitted.

In fact, it appears that the DOL is hoping that advisers and financial institutions relying on BICE (or the principal transaction exemption) will hold off on providing retirement investors with Transition Period disclosures until after the delay (if any) is finalized. In the FAB, the DOL expressed its concern over investor confusion resulting from disclosures that communicate uncertain applicability dates and “conditional” acknowledgements of fiduciary status.

Finally, the FAB states that the DOL will consider additional relief as necessary, including a potential prohibited transaction exemption. As we explain below, we believe additional relief will be needed, because the enforcement policy set forth in the FAB provides relief only from DOL enforcement, not from prohibited transaction excise taxes or private litigation.

Does the FAB provide absolute protection?

No. The FAB provides no protection or assurances against action by other regulators or the private sector. Unless the DOL issues a class exemption providing relief for prohibited transactions occurring during a “gap period” (or a “reasonable period” after the decision not to delay the Rule is published, if this should occur), the enforcement policy alone won’t provide relief for “conflicted” advice to IRAs or for excise taxes resulting from prohibited transactions involving ERISA plans.

The DOL has no jurisdiction over the enforcement of the prohibited transaction rules for IRAs, or the assessment of excise taxes, which is handled by the IRS in all cases.

As a statement of the government’s intent, however, the FAB is a very important first step. It puts the DOL on record as wanting to avoid negative consequences that would result from a temporary application of the Rule. We applaud this, and hope DOL will build on this foundation, providing an even stronger statement of its intentions to hold harmless those who act in good faith.

What should advisers and financial institutions do now?

Despite the limited relief, advisers and financial institutions may want to proceed with their compliance efforts. While we believe the Rule will probably be delayed, the delay would only be until June 9. During the 60-day delay period, the Rule will be re-reviewed. It may be ultimately modified or revoked, but the final result is far from certain.

Second, it is important to remember that compliance with the current fiduciary and prohibited transaction rules is required in the meantime. The publicity surrounding the Rule has resulted in fiduciary status and “conflicted” recommendations from advice fiduciaries becoming more closely scrutinized.

If no delay occurs (which is unlikely, in our view), compliance with the Rule would be required within a “reasonable period,” even with respect to DOL enforcement. For disclosures required during the BICE Transition Period, the 30-day cure period could be regarded as a safe harbor of sorts.

In other cases, the FAB does not explain what the DOL would consider a “reasonable” period, but it could be quite short. The FAB provides some flexibility for institutions to consider whether to wait and see what happens in early April, but the relief is not absolute. Advisers and financial institutions should follow further developments closely, and we intend to provide updates to our financial services clients as they unfold.

FIA Yields That Clients May Never See

Posted on March 17, 2017 by Kerry Pechter -

Not long ago, an investor read about a new, fee-based, fixed indexed annuity (FIA) contract with a crediting rate that was 50% richer than similar commission-based products. So he called an online insurance broker to buy it from one of their licensed agents.

Slight confusion ensued. The agent executed the paperwork, but when he contacted the life insurance company that issued the FIA, he found he couldn’t collect a commission or charge an advisory fee. Unsure what to do, the agent—who didn’t want his name used—completed the transaction anyway.

In the past six months, three life insurers have issued no-commission FIAs. They did so because many agents and advisors who have been selling FIAs on commission are expected to switch to asset-based compensation (in part to avoid signing the Department of Labor’s legally onerous “Best Interest” pledge). At least three more carriers are said to be building fee-based FIAs.

Stripped of distribution costs, the new no-commission FIAs are potentially much richer than commission-paying FIAs. Great American’s no-commission Index Protector 7 FIA, for instance, caps the maximum amount of interest the client can earn in a year from growth of the S&P 500 at 7.25%, or 40% to 50% higher than on the commission version.

Even if investors are paying close enough attention to notice the bump in value, they probably won’t be able to benefit from it. Fee-based advisors who sell FIAs are expected to charge their customary annual fees of 1.0% to 1.5% on the annuity assets, which would offset the clients’ gains. They could charge less, but at their own expense. As for FIA issuers, they generally don’t want one of their distribution channels to have a price advanage over another.

Fixed indexed annuities, whose premiums are invested bonds and equity options, have always been “black boxes,” with opaque crediting methods. Some insurance marketers have billed them as “no fee” products; because the commissions are built into the calculations of the caps on crediting rates. But the heightened transparency of the new no-commission products reveals how much FIA buyers have been paying agents: an estimated 40% of the potential gains of a multi-year contract.

Would more people buy FIAs, which in certain markets offer better downside protection and more upside potential than bonds, if more of the value trickled down to the client? Unless fee-based advisors decide to sell FIAs for less than their usual fee, we may never find out. But the opportunity now exists, and the new products are clearly more consumer-friendly.

“If I were buying an FIA, I’d rather have the value in the product. That’s the product I would sell to my mother,” said Paul McGillivray, an attorney, sales director at M&O Marketing, an insurance marketing organization (IMO) in the Detroit area, and former senior vice president at CreativeOne, a Kansas IMO.

“A few years back I predicted $100 billion in FIA sales by now, based on the appeal of the core value proposition of the product,” said David Macchia, CEO of Wealth2k, which creates online marketing packages for independent advisors. “I postulated that the ‘good’ (the core value) would be delinked from the ‘bad’ (high commissions), and that more advisors and investors would crave the value prop. I still believe that, although the date has been pushed back a bit.”

In practice, the no-commission FIA may simply plug a potential hole in the issuer’s product offering, giving FIA-loving agents a product they can sell if they switch to fee compensation. “At least during the transition from the old world to the new world, I suspect that no-load FIAs won’t just step in and produce the kinds of sales numbers that we’ve seen from commissioned products,” said Tim Pfeifer, a consulting actuary who is currently helping companies design no-commission FIAs. “There will probably be a transition with lower sales. A lot of companies will have them, but we won’t see billions and billions of dollars in sales.”

The fee-based advantage

So far, Great American Life, Allianz Life and Lincoln Financial Group have issued no-commission annuities. At least three other firms are building them. At the wholesale level, these products offer as much as 50% more upside to policyholders as they do when a commission is factored into the calculation of their crediting formulas. (The basic principle behind FIAs is fairly simple; most of the contract assets are invested in the insurer’s general fund, but a small percentage of it is invested in options on an equity index.)

For instance, the maximum annual interest rate that could be credited to a typical commission-based FIA linked to the S&P 500 might be 4% per contract year, while the no-commission product might be as much as 6%. (Commission-based FIAs have sometimes been marketed as having “no fees,” because the distribution costs were built into the crediting terms.)

“There are higher rates/caps and higher income benefit guarantees on our fee-based FIA product relative to the most comparable commission-based FIA product we offer,” said Jeff Faust, a spokesperson for Allianz Life, which launched its Retirement Foundation ADV fee-based FIA, which has a lifetime income rider, told RIJ recently.

“However, once you factor in a typical advisory fee (coming from client assets outside the annuity for the advice on the annuity), the economics to the client are very similar between the fee-based FIA and the commission based FIA. Technically, an insurance agent cannot sell a no-commission product and collect a fee for this advice,” Faust wrote in an email. “Regarding how much a fee-based advisor can charge, it is the advisor’s responsibility to work out with their client the fees that they are charging for the advice they are providing.”

At Lincoln Financial, the fixed rate option for the Covered Choice 5 FIA is 2.85% for the no-commission version and 2.25% for the commission version. The crediting cap with a one-year point-to-point contract linked to the S&P 500 is 5.60% on the no-commission product, versus 4.25% on the commission product, according to Brian Wilson, Lincoln Financial’s assistant vice president, product development, FIAs.

Under the “performance trigger” option, the fee-based version of Covered Choice 5 pays 4.75% in contract years when the S&P 500 is positive, versus 3.75% for the commission product, Wilson said in an interview.

One important difference between the two types of FIAs is that someone needs only an insurance license to sell the commission-based version. But to sell a fee-based FIA, advisors who recommend the product must have securities licenses (even though the product is not a registered security) and they or their firm must be insurance-licensed and have a selling agreement with the life insurer that issued the contract.

“A fee-based fixed indexed annuity is an insurance contract but we do have the restriction that you must be both insurance-licensed and an investment advisor—primarily because it pays no compensation and we don’t want insurance agents running around charging fees without the proper licensure,” said Joe Maringer, national sales vice president for annuities at Great American Insurance Group. “There are certain scenarios where an RIA (registered investment advisor) firm may have an insurance-only person on staff that we would allow to write this contract. The billing for the annuity would take place at the firm level.”

There’s “no channel conflict,” Maringer added, in the sense that consumers might get a better deal with an advisor than with an agent. The new product simply “opens up to fee-based advisors who want principal protection and upside opportunities that haven’t sold FIAs because they paid a commission” and “provides choice to the consumer on how they want to pay for service. This will become a bigger point over time and as the market continues to be educated around financial planning,” he said.

How distributors see it

Mike Tripses is CEO at CreativeOne, which acts as a wholesaler to retail insurance agents. It also owns Client Securities, a broker-dealer, and has set up an RIA that employs investment advisor representatives (IARs), who are fiduciaries. As an actuary, Tripses has also designed FIAs.

“Yes, the [no-commission FIAs] have higher crediting rates or adjustment factors on the indexed allocations. However, these products are not distributed for free. Agents are not ‘Mother Theresa.’ They have expenses, businesses and families to feed,” he told RIJ in an email.

“No-commission FIAs are designed to be sold by IARs who manage money,” Tripses wrote. “Some of these allow fees of 1% or more per year to be withdrawn directly from the account value of the annuity. Others do not: the fee must be deducted from other cash accounts of the assets under management. Over the term of the product the results of non-commissioned and commissioned FIAs may not be that different. The non-commissioned FIA will just be more transparent.”

He added: “Yes, market pressures will move things in the future. However, all of the carriers we are working with today have indicated that they believe their all-in pricing for commissions in today’s products are reasonable. I see no ‘rush to the bottom’ occurring. That doesn’t mean there might not be an eventual inexorable drift. There may be advisors/agents who charge less than a point, reasoning that the FIA asset is more hands-off for them. That would change the calculation, of course, and may lead to downward pressure on up-front commissions as well.”

Commonwealth Financial Network, a Waltham, Mass. broker-dealer and RIA, no longer allows its 1,700 independent advisors to accept commissions when selling annuities to clients with pre-tax retirement accounts, such as rollover IRAs. So when they recommend an FIA to a client, they will include the FIA contract value in the balance on which they charge an annual percentage.

Brian Donahue, the relationship manager for insurance and annuities at Commonwealth, told RIJ that the firm’s advisors may end up selling fewer FIAs in the future because the commissions, at least in part, drove the sales. And even though the higher caps on the fee-based FIAs are alluring, the new products won’t necessarily offer any higher returns for investors and won’t offer advisors any more compensation than they can earn by recommending simpler products, like mutual funds.

“The nice thing about these products is that, once you strip the compensation, they are super robust—amazingly so. You’d be crazy not to look at these products because of how rich they are,” Donahue said. “But there’s less incentive to sell it. That’s why there’s a concern with the fiduciary rule, and why it ends up hurting investors.” His firm is unsure how much guidance to give its advisors about fees. In theory, Commonwealth advisors can charge anywhere from zero to 2.25% per year on the FIA assets.

“These products are still brand new. We’re still deciding internally whether to tell advisors, ‘You can’t charge more than 1.25% as a wrap fee,’” Donahue added. But that’s not Commonwealth’s style. “At Commonwealth we hate to put too much overbearing restraint on advisors. They are independent, and obviously different from wirehouse advisors.”

The ground rules for selling annuities to retirement clients is different at Raymond James. Its advisors can still sell commission-based FIAs to retirement clients, as long as they sign the DOL’s Best Interest Contract Exemption, which forces them to promise to act as a fiduciary and ignore their own financial interests. They can avoid signing the BICE by selling no-commission FIAs and charging an asset-based fee. They are fiduciaries nonetheless, but unlike signers of the BICE they would not be vulnerable to a federal class action lawsuit from dissatisfied investors.

“We’re offering both [fee-based and commission-based FIAs],” said Scott Stolz, senior vice president, PCG Investment Products, at Raymond James. “It’s obvious that, DOL or no DOL, this whole process is pushing more and more advisors to a fee-base-only model. We have told our insurance companies that they will need a fee-based alternative for those advisors [who don’t take commissions or use the BICE]. Even the firms like ours, that are planning to use the BICE and will continue to offer commission-based products, will find that the advisors will make their own choices.”

‘Nothing stops commoditization’

The future of FIA sales is more uncertain than it has been since the George W. Bush administration, when the Securities & Exchange Commission attempted unsuccessfully to classify them as securities products subject to supervision by the SEC and FINRA. The Obama fiduciary rule was almost certain to dent FIA sales because it added a regulatory hurdle to sales by commissioned agents. But now that rule is in jeopardy.

David Macchia, CEO of Wealth2k, believes that with the increasing transparency and commoditization of financial products, the old labor-intensive model of making money by selling products is coming to an end, with or without the Obama fiduciary rule.

“Even if manufacturers wish to avoid channel conflict, the mere existence and availability of a zero-commission FIA creates pressure to lower compensation on all FIAs,” Macchia told RIJ in an e-mail. “It’s like injecting a bacteria-fighting cell into the body. Gradually the drug wipes-out more and more high-commission disease cells. Placing the FIA in an advisory account offers benefits. But I cannot see how charging 1.25% or even 1% is justifiable. Maybe not immediately, but over the mid-term I don’t think that will be viable. Nothing stops commoditization.”

At the least, FIA sales, which have risen steadily for several years because of their unique combination of downside protection and upside potential, will be adversely affected this year. “You see dire projections that sales will drop by 50% percent. I’m not in that camp,” said actuary Tim Pfeifer. “There’s a demographic movement in favor of FIAs. I have confidence in the creativity of carriers. They will overcome the challenges facing FIAs and the marketplace will rebound.”

As expected, Fed nudges target rate higher

Posted on March 16, 2017 by Editorial Staff -

On March 15, 2017 at 2 p.m., the Federal Reserve published the following announcement:

Information received since the Federal Open Market Committee met in February indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate was little changed in recent months.

Household spending has continued to rise moderately while business fixed investment appears to have firmed somewhat. Inflation has increased in recent quarters, moving close to the Committee’s 2% longer-run objective; excluding energy and food prices, inflation was little changed and continued to run somewhat below 2%. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will stabilize around 2% over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 0.75% to 1%. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2% inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2% inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Jerome H. Powell; and Daniel K. Tarullo. Voting against the action was Neel Kashkari, who preferred at this meeting to maintain the existing target range for the federal funds rate.

The Fiduciary Rule Delay and Legal Exposure: One Law Firm’s Opinion

Posted on March 15, 2017 by Editorial Staff -

Specifically, the FAB provides that the DOL will not take enforcement action for non-compliance with the Fiduciary Rule, including its related exemptions, in two cases:

Does the FAB provide absolute protection?

The DOL has no jurisdiction over the enforcement of the prohibited transaction rules for IRAs, or the assessment of excise taxes, which is handled by the IRS in all cases.

What should advisers and financial institutions do now?

Anecdotal Evidence: What Fee-based Indexed Annuities Reveal

Posted on March 15, 2017 by Kerry Pechter -

DC plans deliver less income than DB plans, study shows

Posted on March 15, 2017 by Editorial Staff -

The historic shift from defined benefit to defined contribution retirement plans over the past few decades has produced an overall reduction in the guaranteed retirement income available to retirees, according to a new research brief from the Center for Retirement Research at Boston College.

“Employer-sponsored plans are providing less income today than in the past,” the brief said. Expansion of DC coverage, wider use of auto-enrollment and auto-escalation of contributions, and reduced leakage would help turn the situation around, wrote authors Alicia Munnell, Wenliang Hou and Anthony Webb.

DB plans produced more income in part because their professionally managed investments enjoyed higher returns and because they have access to “actuarially fair” annuities that cost about 15% less retail annuities available to retirees from DC plans, the study showed. Some DC participants appear to be making up their shortfall by retiring later than DB plan participants.

The researchers’ data on the amount and distribution of retirement wealth, the amount of retirement income it produces, and the pattern of replacement rates for households ages 51-56 in 1992, 1998, 2004, and 2010 came from the Health and Retirement Study (HRS).

Among the findings:

Retirement wealth has been relatively steady or declining, depending on whether the starting year is 1992 or 1998.
DC wealth is more concentrated in the top quartile of education than DB wealth, and this concentration will become more evident in the aggregate wealth measure as the shift from DB to DC plans evolves.
While DB participants face actuarially fair annuities, DC participants have to buy annuities on the open market where marketing and other costs reduce annuity factors by about 15-20%.
The interest rate used to calculate commercial annuity rates has declined sharply since 1992, while the interest rate assumption for DB annuities has stayed at 5.8%. The lower yield on DC wealth and its increasing importance over time has led to a decline in the total wealth-to-income ratio.
The shift from DB to DC has reduced the amount of retirement income per dollar of wealth because DC participants have to pay more for annuities, and annuity rates fell as interest rates dropped.
Even with later retirement ages, flat retirement income combined with rising wages has produced declining replacement rates. Thus, retirement income from employer plans has been contracting.
Coverage has declined from 68% in 1992 to 63% in 2010. (A household is classified as being covered by a retirement plan if one or both spouses is currently receiving DB benefits, is covered by a DB pension or participating in a DC plan on a current job, or has DB or DC assets from a past job.)
DC wealth is skewed more toward those with more education and higher earnings, with the top quartile holding 52% of total DC wealth in 2010 compared to 35% of DB wealth.

Without significant changes to the DC system, the authors warned, “future retirees will be much more dependent on Social Security than those in the past, which is problematic given the reduced support due to the rising Full Retirement Age and the need to close the program’s long-term funding gap.”

Older, poorer Americans take a hit under Ryan health plan

Posted on March 15, 2017 by Editorial Staff -

If “Obamacare” was meant to redistribute federal health insurance subsidies toward low-income people, the new American Health Care Act (AHCA) clearly reverses that effort, either ending the subsidies or directing them toward higher-income Americans. The difference in political philosophies behind the two plans could not be more stark.

Poor people ages 50 to 64 would fare the worst under the new plan. In its March 13 analysis of the American Health Care Act (AHCA)—the proposal to repeal and replace the Affordable Care Act (aka Obamacare)—the Congressional Budget Office identified several points where the proposed law would adversely affect lower-income Americans who are over age 50 but younger than 65, the age when eligibility for Medicare begins.

The current version of the proposed law, which will likely be amended in the House before moving to the Senate, generally aims to repeal the taxes that the ACA levied on affluent Americans. In doing so, it would cut off the revenue stream that subsidized the cost of health insurance for Americans closer to the federal poverty level.

A switch from the ACA to the AHCA would also result in a large increase in the numbers of uninsured people in the U.S., according to both the CBO and Congress’ Joint Committee on Taxation, and low-income older people would suffer most.

“The increase would be disproportionately larger among older people with lower income; in particular, people between 50 and 64 years old with income of less than 200% of the FPL (federal poverty level) would make up a larger share of the uninsured,” the report said.

The CBO estimated that 48 million people under age 65, or roughly 17% of the nonelderly population, would be uninsured in 2020 if the AHCA were enacted as it is currently written. In 2026, that figure would reach 52 million: Roughly 19% of the nonelderly population, or almost double the 10% projected under the ACA. (That figure is currently about 10% and is projected to remain at that level in each year through 2026 under current law.)

Because older people tend to need more medical care than younger people, the new legislation would allow insurers to charge older people five times more than younger ones, beginning in 2018, unless state set a different limit, the CBO’s report said. Under the ACA, insurers could not charge older people more than three times as much as younger people in the individual and small-group markets.

The CBO and the JCT both expect that this change would have to wait until 2019 in order to give the federal government, states, and insurers enough time to incorporate the changes and set new premiums.

The number of people enrolled in coverage through the non-group market because of these changes would increase by less than 500,000 in 2019, probably more younger people and fewer older would enroll, the CBO and JCT estimated. This increase, described by the CBO as small, “would mostly stem from net changes in enrollment among people who had income high enough to be ineligible for subsidies and who would face substantial changes in out-of-pocket payments for premiums,” the report said. Currently, people eligible for subsidies in the non-group market are largely insulated from changes in premiums.

In 2020, instead of the receiving tax credits or cost-sharing subsidies, people who bought insurance in the non-group market would receive refundable tax credits, based on their age. For instance, the credit would be $4,000 for those age 60 or older and $2,000 for those under 30. The full tax credit would be available to those with adjusted gross income of $75,000 ($150,000 for joint filers) who weren’t eligible for certain other types of insurance. It would phase out gradually for people with income above those thresholds.

A tax credit would be refundable to the extent that it exceeded a person’s tax liability. The credits could be advanced to insurers on a monthly basis on behalf of an enrollee. Alternately, enrollees could apply the tax credits to the purchase of most health insurance plans, either through a marketplace or directly from an insurer.

The change in age-rating rules, effective in 2019, would change the premiums faced by different age groups. Premiums for young adults would go down and premiums for older people would go up. By 2026, CBO and JCT project, premiums in the non-group market would be 20% to 25% lower for a 21-year-old and 8% to 10% lower for a 40-year-old—but 20% to 25% higher for a 64-year-old.

According to a New York Times report this week, “By 2026, the uninsured rate for those 50 to 64 earning less than about $30,000 would more than double, from around 12% to around 30%.”

The change to age-rating rules would allow older adults to be charged five times as much as younger adults in many states. This is expected to change the mix of enrollees in 2019 relative to 2018. A one-year change to the premium tax credits would “somewhat increase enrollment among younger adults and decrease enrollment among older adults,” the CBO expects.

Winners under the new legislation would be higher-income young people. CBO and JCT estimated that a “21-year-old with income at 450% of the FPL in 2026 would be newly eligible for a tax credit of about $2,450 under the legislation but ineligible for a credit under current law.” Those lower out-of-pocket payments would “tend to increase enrollment in the non-group market among higher-income people.”

The new tax credits are “designed primarily to be paid in advance on behalf of enrollees to insurers,” the CBO pointed out. The Internal Revenue Service and the Department of Health and Human Services would have to verify that the credits were being paid to eligible insurers who were offering qualified insurance, as defined under federal and state law on behalf of eligible enrollees.

According to the CBO, Congress would therefore need to appropriate enough money to those agencies to make sure that systems were put in place to make the payments to insurers in a timely manner. “To the extent that they were not, enrollment and compliance could be negatively affected,” the CBO report said.

AIG looks for new CEO

Posted on March 15, 2017 by Editorial Staff -

AIG CEO Peter D. Hancock, 58, announced last week that he would resign from his post, staying only until the AIG board chooses a successor, the New York Times reported this week. AIG’s life insurance companies are among the largest issuers of fixed and variable annuities, with $13.6 billion in total annuities sales through the first three-quarters of 2016.

The announcement followed a quarterly loss of $3.04 billion that surprised investors last month. Hancock, a former J.P. Morgan banker, is the fifth chief executive since Maurice R. Greenberg was forced out in 2005.

The billionaire Carl C. Icahn, who has a 4.7% stake in AIG, publicly called in 2015 for AIG to be split up and to hire new leadership. He and billionaire John Paulson, who owns about 0.49% of AIG, supported Hancock’s January 2016 plan to sell assets, cut costs and jettison less profitable insurance policies.

AIG nearly became insolvent during the 2008 financial crisis and needed a $185 billion government bailout. Recently AIG’s performance lagged its peers. Its recent quarterly loss followed a $5.6 billion increase in reserves to cover potential claims.

Hancock left J.P. Morgan in 2000 after its merger with Chase Manhattan Bank. He joined AIG in 2010 as executive vice president for finance, risk and investments and later ran its property-and-casualty arm. In 2014, he succeeded the late Robert H. Benmosche, a former MetLife chairman who came out of retirement in 2009 to lead the insurer.

Honorable Mention

Posted on March 15, 2017 by Editorial Staff -

Voya introduces new resources for plan sponsors

Voya Financial, Inc. is introducing a suite of resources to help retirement plan sponsors design plans with better choice architecture, more automated features, and strategies like re-enrollment of participants who are under-saving.

Intended for plan sponsors in all market segments, the package of new materials includes a series of informational webcasts and a new digital communication vehicle. The resources are designed to augment engagement through digital channels and cover these topics:

Improving retirement plans using behavioral science
Myth vs. reality: The building blocks for a successful retirement plan
How employers can support the special-needs community
Building retirement relevancy for Millennials

The new content lives at voyainsights.voya.com.

Half of elderly black women in America are poor: ReLab

The unemployment rate for workers age 55 and older declined by 0.1 percentage points, to 3.4%, from January to February 2017, according to the Bureau of Labor Statistics. The data was reported by the SCEPA Retirement Equity Lab (ReLab) at The New School in New York.

“While the headline unemployment rate for older workers is low, women still face sex discrimination in the labor market. Older women earn less than men,” the ReLab release said. In other findings:

Among full-time workers aged 55 to 64, men earn an average of $50,000 a year while women earn an average of $37,000.
Black women earn $35,000 on average, or $15,000 less than men, while Hispanic women average $27,000, or $23,000 less than men.
Low-earning workers are more likely to be poor in retirement. Women are at higher risk for poverty because they live 2.5 years years longer than men, on average.
28% of elderly men and 36% of elderly women are poor (income <$11,880) or near-poor (income <$23,760).
43% of elderly Hispanic women and 51% of elderly black women are poor.

ReLab economist Teresa Ghilarducci advocates the establishment of “Guaranteed Retirement Accounts (GRAs),” which are mandatory individual defined contribution accounts designed to purchase annuity income at retirement and supplement Social Security benefits.

Survey describes compensation levels for fixed rate annuities at banks and credit unions

The expected sales compensation for fixed rate annuities under the Department of Labor’s (now uncertain) fiduciary rule at bank broker-dealers and at third-party broker-dealers that partner with banks and credit unions is “somewhat more than 3%, compared to 4% for indexed annuities and even higher for variable annuities.”

That finding was reported by the consulting firm of Kehrer-Bielan, based on a survey conducted in January 2017 among 20 broker-dealers with over 6,000 advisors serving almost 3,000 banks and credit unions. The survey was commissioned by Global Atlantic Financial Group to find out how distributors intend to adjust their product menus under the fiduciary standard.

According to the survey:

Firms that intend to segregate product offerings by type of account (retirement or taxable) have slightly lower sales compensation expectations than the firms that will have a one-size-fits-all product menu.
The median expected sales compensation is 3% for fixed rate annuities across both kinds of firms, but the average compensation in the firms with the same product menu for all clients is slightly higher, due to the expectation of commissions as high as 5% in some firms.
The range of expected sales compensation in the firms with separate product menus for retirement and retail investment accounts is from 2.5% to 4.3%—below the range at both the high and low ends for firms that plan to offer the same products to all clients.
Firms that plan to offer the same products to all types of accounts will all offer fixed rate annuities to retirement accounts.
A slim majority will allow advisors to choose between among several up-front/trail commission options, and almost three-fourths expect agents to receive the same sales compensation for each fixed rate annuity on their menu.
A significant number of firms that plan to have separate product menus for taxable and retirement accounts are still undecided about whether to include fixed rate annuities in retirement accounts, whether to permit advisors to choose among commission options, and whether to offer fixed rate annuities with sales compensation that varies by consumer benefits.

“Ten months since the announcement of the Rule, some of these firms are still not clear on how to best adapt their business model while balancing commitments to their clients and advisors,” Kehrer-Bielan’s report said. “Among the firms that have decided on commission structures, the majority would not offer commission options to their advisors and three-fourths want to be paid the same sales compensation for each fixed rate annuity in retirement accounts.”

DOL Hears Public Comments on Fiduciary Rule (Again)

Posted on March 9, 2017 by Kerry Pechter -

It’s Groundhog Day all over again. A year after the fiduciary can-of-worms appeared closed forever, the Trump victory re-opened it. Opposing parties are again rehashing the pros and cons of the Department of Labor’s 2016 conflict-of-interest rule. Once again, we’re debating whether the distribution of financial products is over- or under-regulated.

Spoiler Alert: Consumers and robo-advice companies tend to like the rule as it stands. Broker-dealers and insurance product distributors hope that the rule joins socialism in history’s dustbin.

As of noon yesterday, 215 individuals or firms had submitted comments to the Department of Labor’s website regarding the DOL’s proposal to delay the applicability date of the “fiduciary rule” so that it can reassess the rule in light of the Trump administration’s objectives.

The comments fall into three familiar categories. Distributors of financial products almost universally hate the rule. They resent the implication that they are not already serving clients responsibly, and they credit commissioned sales—which are more difficult under the rule—with providing an incentive to serve middle-class clients.

“I have been in the insurance business selling fixed annuities with no market risk for 40 years, selling IRAs, never had a complaint,” wrote Richard Dysart of San Diego. “Most of my clients are of a modest income and will not pay a fee to an adviser.

“The reps selling variable annuities and securities are exposing their clients to more risk,” he added. “Keep licensed agents who sell only fixed products out of these rules. Our state insurance commissioners are all ready doing a good job of weeding out the few bad apples.”

In the same vein, Henry D’Alberto of Easton, Pa., wrote: “We are a small business in Pennsylvania with a total of four employees. My father started our company in 1991 and I would like to continue running our family business if possible. We have a total of 13 registered representatives (brokers) who have almost 200 years of experience in the securities business.

We have never had an official customer complaint and only one disclosure from FINRA over the past 25 years. If this conflict of interest rule goes through as written we will almost surely have to sell our firm and join a much larger group because we cannot afford all of the compliance costs and don’t have the expertise needed to properly follow the rule as it is written.

“We believe it is too burdensome in order to properly operate which will hinder our ability to focus on our customers’ needs and wants. We are extremely worried about the potential litigation that could arise from this law dealing with the BICE contract (we are not lawyers and do not have lawyers on staff). In discussing the rule with current clients they don’t really understand why the government is getting so involved with their retirement savings and they continue to ask me if they can continue to work with me.”

But Financial Engines and Betterment, two firms that provide automated investment advice to 401(k) participants and individual investors, defended the existing fiduciary rule. Financial Engines rebutted the claim that the rule will deprive middle-income savers of access to financial services.

“We believe the Conflict of Interest Rule or a similar regulation is workable for investment advisors and beneficial for investors,” wrote Chris Jones, Financial Engines’ chief investment officer. “Our business model and market experience are proof that technology can help investment advisors profitably offer high-quality, unconflicted advice to investors, even those with modest account balances.”

Jon Stein, founder and CEO of Betterment, wrote: The fiduciary rule is necessary to ensure that Americans receive investment advice that is in their own interests, instead of conflicted sales pitches for high-fee products.

“For years, the financial industry has put its own interests first, costing investors billions of dollars. The fiduciary rule, which is currently slated to go into effect on April 10, would change that. We believe that any delay would needlessly perpetuate conflicted advice at investors’ expense.”

As for comments from citizens, Carman Kazanzas of Henderson, Nevada wrote, “As a retiree I want to know I can trust a financial advisor to put my needs above his or her profit. Do not delay this protection any longer. Do not take us back to the years where greed trumped everything.”

Similarly, “It shouldn’t be difficult for me to know I am getting sound advice from a trusted advisor rather than a salesman,” wrote Betty Skivanek of Allentown, Pa. “Many investment advisor firms have already changed their models to reduce conflicts of interest in light of the original rule. We should not interrupt these positive developments by delaying the rule.”

The Dollar as Reserve Currency: Benefit or Burden?

Posted on March 9, 2017 by Kerry Pechter -

“There’s no such thing as a global currency,” President Trump told an audience at the Conservative Political Action Conference recently. This was a bold, even brash statement, given the fact that the U.S. dollar has been the world’s reserve currency since the first Boomer was born. The president seemed to suggest that it isn’t, or shouldn’t be.

The president didn’t elaborate on his comment. But, based on his well-known concerns about the size of the U.S. debt, he may believe that the U.S. became the world’s biggest debtor by providing the reserve currency, and that, in the spirit of Ayn Rand’s Atlas Shrugged, Uncle Sam should shrug off that burden as a step toward shrinking its debt.

Should the dollar abdicate its role as the lingua franca of money? To better understand that issue, RIJ called economist Barry Eichengreen of the University of California, Berkeley. He wrote Exorbitant Privilege: The Rise and Fall of the Dollar and the Future of the International Monetary System (Oxford University Press, 2011).

Here’s a transcript of our conversation:

RIJ: How does the U.S. benefit from being the provider of the so-called “reserve currency?”

Eichengreen: The most obvious effect is that there’s an additional demand for dollars, and specifically for U.S. Treasury bonds, from the People’s Bank of China and other holders of foreign reserves. That allows the U.S. government to borrow at lower interest rates. And as other investors look around for more attractive yields, they buy U.S. corporate bonds, among other things, enabling U.S. firms to similarly enjoy the ability to borrow and fund their operations at lower costs.

More generally, the global financial system—not just central banks but other financial institutions—runs on dollars. So if there’s a technical problem, or a crisis, the Fed can resolve it by providing additional dollars. Other central banks, which can’t print dollars, lack that ability.

RIJ: What is the main drawback to being the provider?

Eichengreen: The dollar exchange rate is stronger than otherwise, because foreigners are buying dollar-denominated assets, which makes U.S. exports at least modestly less competitive. By my estimates, however, this effect is relatively small.

RIJ: Does the size of U.S. debt and deficits pose an immediate crisis for the nation? Is it like a cancer for the country?

Eichengreen: Less government debt is better than more government debt from a national-economic-health point of view. But a cancer? We’ve learned that there’s no magic number—no cliff at a debt-to-national-income ratio of 90%, for example—where cancer suddenly sets in. The best way to stabilize, even bring down, the debt to national income ratio is of course to grow the denominator. Easier said than done, alas.

RIJ: Is a funded debt a source of wealth, as perhaps Alexander Hamilton saw it?

Eichengreen: That debt is a source of liquidity—that’s how I think about it. Recall how in the late 1990s, toward the end of the Clinton Administration, people were worried about the entirety of the federal government debt being retired, and the problem that there wouldn’t be enough liquid, high-grade debt securities to lubricate the financial system. Well, that scenario certainly didn’t develop.

RIJ: Many people worry about the size of the U.S. debt and deficits, and think of the national debt as they would a large credit card balance for a household. Is that an accurate way to think about it?

Eichengreen: The analogy between the household balance sheet and the government balance sheet doesn’t make sense; this is one of the first things students learn in first-year macroeconomics. Under certain circumstances—namely depressed economic conditions—more deficit spending can boost economic growth. In that situation, running a deficit is less of a problem—just like a household needs to worry less about its credit card balance when its income is rising rapidly.

It also makes a big difference whether the additional deficit spending is being devoted to productive investments or not, just like it matters whether a household is using its credit card to pay for the kids’ college education or to go to Disney World.

RIJ: People sometimes hear that China and other large holders of U.S. debt could bully us by threatening to stop buying our debt and “financing our deficits.” Is that a legitimate worry?

Eichengreen: It is something to pay attention to. But were a country like China to sell off a significant share of its U.S. Treasury portfolio, it would drive down the price of its remaining holdings. So this attempt to “bully” the United States would impose significant costs on the bully. Selling off the entire Treasury portfolio would of course only be possible at fire-sale prices.

RIJ: Do other countries benefit from holding U.S. debt? Do they value it as the world’s safest financial asset and a substitute for gold? Or do they suffer from holding it?

Eichengreen: They benefit from the reliable stream of interest payments and lower volatility than is provided by alternatives like gold. They also benefit from being able to hold an asset whose value is a bet on the vigor of the U.S. economy, since the more vigorous the U.S. economy the stronger the dollar. If they didn’t reap benefits, they wouldn’t hold dollars, after all.

RIJ: People also hear that the interest on the U.S. debt will soon become the biggest item in the U.S. budget, with terrible consequences. Given that much of the debt is held by U.S. government agencies, by the Fed, or by U.S. citizens, and that the Fed sends the interest that it earns on its own assets to the Treasury, is the interest on the debt such an apocalyptic threat?

Eichengreen: To the extent that we Americans hold our own debt, either directly or through our own government agencies, interest payments on it is a transfer from one set of Americans to another. To be sure, there exists a small subset of U.S. citizens who regard every transfer payment as an apocalyptic threat. I wouldn’t count myself amongst them.

RIJ: Thank you, Professor Eichengreen.

Netting $317 billion, Vanguard dominated fund flows in 2016: Morningstar

Posted on March 9, 2017 by Editorial Staff -

Worldwide asset flows of mutual funds and exchange-traded products (ETPs) fell to $728 billion in 2016 from about $1 trillion in 2015, but net flows to the U.S. fund industry rose to $288 billion in 2016 from $260 billion in 2015, according to Morningstar’s fifth annual Global Asset Flows Report, released this week.

In 2016, investors went “back to the basics, looking for less risky assets, positioning their portfolios in expectation of rising interest rates, or selling off equities after a significant run-up,” said Alina Lamy, senior market analyst for Morningstar, in a release.

“Fixed-income strategies saw the largest flows globally in 2016 and commodity funds experienced a high organic growth rate, with the largest inflows going to the precious metals category,” the release said. Outside the U.S., cross-border funds had flows of $138 billion, European funds had flows of $103 billion, and Asia funds had flows of $134 billion.

Highlights from Morningstar’s 2016 Global Asset Flows Report include:

Flows shifted to low-risk assets last year. In 2016, fixed income and money market received the largest flows, with $412 billion and $196 billion, respectively. In 2015, the top-receiving category was equity, with $346 billion, followed by allocation, with $167 billion. In terms of organic growth rates, commodities grew the fastest at 25.7% in 2016.
Vanguard, buoyed by the popularity of its low-cost index funds, dominated with 2016 net inflows of $317 billion. BlackRock/iShares was second with $154 billion. State Street grew at an organic growth rate of 12.5% in 2016, the fastest among the top 10 firms.
Generally, firms that included ETPs and lower-cost options grew, while active managers like Franklin Templeton (net outflow of $72 billion in 2016) shrank.
U.S. index funds attracted $492 billion in 2016, while active counterparts saw outflows of $204 billion. In the Asia, cross-border, and Europe regions, however, active flows beat their passive counterparts.
In the equity category, $390 billion went into index funds and $423 billion flowed out of active funds. Fixed income received inflows across both active and passive strategies worldwide.
Funds with quantitative Morningstar Ratings of 4 or 5 stars saw inflows in 2016 of $127 billion and $221 billion, respectively, while 1-, 2-, and 3-star funds suffered outflows. Similarly, funds that have a qualitative Morningstar Analyst Rating of Gold and Silver attracted the largest inflows of $29 billion and $14 billion, respectively, and posted the only positive organic growth rates.
Growing sensitivity to fees helped drive ETP assets to $3.6 trillion globally at the end of 2016.

The Morningstar Global Asset Flows Report is based on assets reported by more than 4,000 fund groups across 85 domiciles. The report represents more than 95,000 fund portfolios encompassing more than 240,000 share classes and includes a global overview as well as analysis about the United States, Europe, Asia, and cross-border offerings.

Morningstar estimates net flow for mutual funds by computing the change in assets not explained by the performance of the fund and net flow for ETPs by computing the change in shares outstanding.

Consumers want safe income but don’t understand annuities, study shows

Posted on March 9, 2017 by Editorial Staff -

Americans wish their financial advisors told them more about retirement income-generating products, according to the Third Annual Guaranteed Lifetime Income Study, produced by survey firm Greenwald & Associates and CANNEX, a source of data on most kinds of annuities.

Nine out of 10 consumers surveyed believe financial advisors should present multiple retirement income strategies, and 61% say advisors should present products that provide guaranteed lifetime income. The survey covered about 1,100 retirees and pre-retirees with more than $100,000 in household assets in December 2016.

But a third of those working with an advisor say they have never discussed these strategies; only about 3 in 10 have discussed annuity products. When advisors discuss retirement income strategies with their clients, clients are three times as likely to purchase a product that guarantees lifetime income, the study showed.

About a third of survey respondents, and 53% of annuity owners, said they are highly familiar with annuities in general. But only between 13% and 16% of those surveyed said they are highly familiar with either variable annuities with income guarantees, fixed annuities with income guarantees, indexed annuities with income guarantees, deferred income annuities, or immediate income annuities.

More than half see these products as desirable, however, when framed as strategies for covering essential expenses in retirement, as a supplement to Social Security. Women, those in poorer health, and those with between $250,000 and $500,000 in assets see the greatest value in products that offer guaranteed lifetime income, the study showed.

Despite having $100,000 or more saved, many of those surveyed expressed anxiety about retirement. The number of respondents concerned about maintaining their standard of living in retirement rose to 34% in 2016 from 25% in 2015.

The share of Americans who were “extremely or very” concerned about their ability to live comfortably in retirement rose to 37% in December 2016 from 30% in 2015. The share who are “very concerned” about earning as much as possible on investments to meet their retirement goals rose to 40%, up from 27% in 2015.

About four in five consumers (81%) think people over age 50 need strategies to prevent significant investment losses. More than half said they would rather own an investment with a lower but certain return than one with a higher but uncertain return. Only about one in five said they know what investments will help them achieve their goals and protect against drops in the market.

“The study reveals high levels of uncertainty post-election, particularly among pre-retirees with lower savings levels, and a focus on maximizing returns in the low interest rate environment,” said study director Doug Kincaid of Greenwald & Associates. “It shows that consumers recognize the value of guaranteed income and expect advisors to discuss income strategies with them.”

The survey showed that many consumers remain concerned about the cost of guaranteed lifetime income products and believe they can get better returns with “other types of investments.” Only a quarter strongly agreed that guaranteed lifetime income products can help diversify a portfolio.

“The data shows when it comes to their investment portfolios, consumers are focused on risk assets including equities, but at the same time want to ensure that in retirement they will have the income they need to meet their needs,” said Gary Baker, president of CANNEX USA. “The lack of familiarity about specific products underscores the importance of providing advisors and their clients options to meet both needs.”

The study did not appear to address two major reasons for persistent public confusion about annuities. First, the word “annuities” is routinely applied to five or six dissimilar products. Second, annuities are often presented as safe investment products instead of as insurance products.

The fact that annuities are insurance, not investments, determines who can sell them, what they cost, and why they involve complicated contracts—factors that will always make an annuity purchase fundamentally different from and more complicated than a mutual fund purchase. A majority of the public will continue to misunderstand annuities as long as ambiguous terms are used to describe them.

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