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FIA Yields That Clients May Never See

Posted on March 17, 2017 by -

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.”

© 2017 RIJ Publishing LLC. All rights reserved.

As expected, Fed nudges target rate higher

Posted on March 16, 2017 by -

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. 

© 2017 RIJ Publishing LLC. All rights reserved.

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

Posted on March 15, 2017 by -

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.

© 2017 Drinker Biddle & Reath LLP. All rights reserved.

Anecdotal Evidence: What Fee-based Indexed Annuities Reveal

Posted on March 15, 2017 by -

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.  

© 2017 RIJ Publishing LLC. All rights reserved.

DC plans deliver less income than DB plans, study shows

Posted on March 15, 2017 by -

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.”

© 2012 RIJ Publishing LLC. All rights reserved.

Older, poorer Americans take a hit under Ryan health plan

Posted on March 15, 2017 by -

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.

© 2017 RIJ Publishing LLC. All rights reserved.

AIG looks for new CEO

Posted on March 15, 2017 by -

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.

© RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on March 15, 2017 by -

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.”

© 2017 RIJ Publishing LLC. All rights reserved.

DOL Hears Public Comments on Fiduciary Rule (Again)

Posted on March 9, 2017 by -

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.”

© 2017 RIJ Publishing LLC. All rights reserved.

The Dollar as Reserve Currency: Benefit or Burden?

Posted on March 9, 2017 by -

“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.

© 2017 RIJ Publishing LLC. All rights reserved.

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

Posted on March 9, 2017 by -

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.

© 2017 RIJ Publishing LLC. All rights reserved.

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

Posted on March 9, 2017 by -

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.

© 2016 RIJ Publishing LLC. All rights reserved.

 

Jefferson National strengthened by its new owner, Nationwide

Posted on March 9, 2017 by -

A.M. Best has removed Jefferson National Life Insurance Company from “under review with positive implications” and upgraded its financial strength rating to A (Excellent) from B+ (Good) and its long-term issuer credit rating to “a” from “bbb-.”   

The outlook assigned to the insurer’s credit ratings is stable, A.M. Best said in release.

Nationwide Life Insurance Company’s (Nationwide) completed its acquisition of Jefferson National early this month. A.M. Best determined that Jefferson National “will benefit from Nationwide’s substantial financial resources and brand name to support growth within the registered investment advisor (RIA) and fee-based advisor marketplaces. Similarly, the transaction will provide Nationwide access to Jefferson National’s RIAs and fee-based advisors, as well as access to the clients they serve.”

In its release, A.M. Best said it expects Jefferson National’s management to remain in place, and the companies expect no changes in Jefferson National’s approach to sales and service. A.M. Best also notes that Jefferson National will be transitioning to the Nationwide brand.

“Jefferson National’s stand-alone credit profile currently benefits from improved profitability, a lower-risk business profile focusing on investment-only variable annuities, increasing assets under management and adequate risk-adjusted capitalization. Offsetting these positive factors are Jefferson National’s current mono-line product portfolio and an inconsistent earnings history,” A.M. Best said.

© 2017 RIJ Publishing LLC. All rights reserved.

Nobody knows you when you’re down and out (and single and old): AARP

Posted on March 9, 2017 by -

Nearly half of U.S. adults age 62 and older experience loneliness, and lonely older adults are likelier to have lower income and fewer assets than non-lonely adults, according to research conducted by NORC at the University of Chicago and funded by the AARP Foundation.

“Income is a significant factor in social connectedness,” said Lisa Marsh Ryerson, president of AARP Foundation. The study is part of Connect2Affect, a collaborative effort by AARP Foundation to learn more about isolation and loneliness in older adults.

Nearly half (48%) of the respondents feel some degree of loneliness; 29% experience “occasional” loneliness while 19% are “frequently” lonely. Socioeconomic status stands out as a differentiator between non-lonely and lonely individuals.

Lonely older adults are much more likely to have an annual household income of less than $25,000 and assets under $10,000, and are more likely overall to be in the lowest income group.

The lonely group is also less likely to be married than the non-lonely group, and more likely to be divorced, separated or widowed. The data show that 14% of married older adults and 30% of unmarried older adults fall into the lonely group.

Married women are at a higher risk of loneliness than married men, but unmarried women are at a lower risk of loneliness than unmarried men. Those with more support and less strain in their marital relationship are at lower risk of loneliness.

Findings were based in part on data from the National Institute on Aging and the National Institutes of Health.

© 2016 RIJ Publishing LLC. All rights reserved.

ClearFit, a turnkey retirement plan from Morgan Stanley and Ascensus

Posted on March 9, 2017 by -

Morgan Stanley Wealth Management and Ascensus have launched ClearFit, a retirement program for small plans in which Morgan Stanley will serve as investment provider and fiduciary and Ascensus will serve as administrator and recordkeeper, according to a news release issued today.

Morgan Stanley will serves as the ERISA Section 3(38) investment manager, assuming the responsibility for selecting the plan’s investments which includes oversight and monitoring of the retirement plan’s fund lineup.

The investment menu will use a multi-manager approach and non-proprietary funds. ClearFit’s target date models will use Morgan Stanley’s proprietary retirement glidepaths.

Ascensus’ administrative services will include:

  • Integrated payroll processing with streamlined data delivery options
  • Retirement account withdrawal, loan and distribution approvals managed by Ascensus
  • Delivery of certain required notices directly to participants’ homes
  • Digital and mobile solutions to help boost employee participation

Details regarding investment, administrative and recordkeeping fees were not available at deadline.

© 2017 RIJ Publishing LLC. All rights reserved.

The Best of Recent Economic Research

Posted on March 8, 2017 by -

Will robots save the U.S. from dreaded “secular stagnation?” Is the loss of manufacturing jobs linked to the rate of single mothers in America? When corporations save more, do households save less?

These and other questions are the subjects of five working papers from the National Bureau of Economic Research (NBER)—and one research brief from the Center for Retirement Research at Boston College—all of which you’ll find summarized below in this installment of RIJ’s Research Roundup series. 

These papers cover very different topics—chatbots, disappearing manufacturing jobs, household savings rates, the dollar as reserve currency, job transitions for older workers, a book about financial regulation—but together the papers identify the points where, even when we don’t realize it, macroeconomics and personal finance intersect.      

“Secular Stagnation? The Effect of Aging on Economic Growth in the Age of Automation” by Daron Acemoglu, Pascual Restrepo (NBER Working Paper No. 23077, January 2017).  

With the new confidence on Wall Street, it’s easy to forget that not long ago economists were predicting the start of an era of “secular stagnation.” That term refers not to stagnation outside the religious community but to non-cyclical economic stagnation, especially in developed countries with aging populations.

In their new paper, economists Daron Acemoglu of MIT and Pascual Restrepo of Boston University predict that robots will forestall stagnation by raising productivity and compensating for the departure of the Boomers from the workplace. Chatbots, industrial droids, and artificially intelligent devices will compensate for the growing shortage of human labor and prevent the economy from sagging over the next few decades, they argue.

The two economists analyzed data from the International Federation of Robotics on industrial robots across a range of industries for 49 countries. The analysis “reveals a strong correlation between…the change in the ratio of the population above 50 to those between 20 and 49, and the change in the number of robots (per million of labor hours) between the early 1990s and 2015,” they wrote.

“If anything,” they wrote, “countries experiencing more rapid aging have grown more in recent decades. We suggest that this counterintuitive finding might reflect the more rapid adoption of automation technologies in countries undergoing more pronounced demographic changes.” 

“When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men” by David Autor, David Dorn, Gordon Hanson (NBER Working Paper No. 23173, January 2017).

On his path to the White House, Donald Trump tapped into the frustration of Americans whose economic prospects have been hurt by the offshoring of manufacturing jobs to China and elsewhere. New economic research points to a precise source of at least part of that frustration.

In “When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men,” Autor (MIT), Dorn (University of Zurich), and Hanson (University of California, San Diego) found the following:

• When manufacturers relocate production facilities outside of U.S., fewer male high-school graduates in the affected communities find high-paying work and fewer females marry the under-achievers (but do have children by them). The result is an increase in drug abuse and single parenthood in those communities.

• Though the paper doesn’t address? retirement security directly, it links offshoring to unemployment and single parenthood. Those factors can undermine the process of education, wealth-building and employer-sponsored savings that sets people up for a secure retirement later in life.

• Manufacturing employment is clearly shrinking in the U.S., the paper points out. In 1990, 21.8% of currently employed men and 12.9% of employed women ages 18-39 worked in manufacturing. By 2007, those numbers had shrunk to 14.1% and 6.8% respectively—declines of 35% among men and 45% among women.  

• Manufacturing jobs tend to pay men more than women, and the authors assert that, for those adhering to “gender identity norms,” marriages are more frequent where men earn more than women, and that women would rather be single parents than be married to men who earn less.

• “A decline in male earnings spurs some women to curtail both motherhood and marriage while spurring others to exercise the option of single-headedness,” the authors wrote. “Conversely…a decline in female earnings raises the relative attractiveness of male partners, which encourages fertility and marriage while single motherhood becomes a less attractive option.”

“The Global Rise of Corporate Saving” by Peter Chen, Loukas Karabarbounis Brent Neiman (NBER Working Paper No. 23133, February 2017).

These three economists found that, in an historical role reversal, corporations now save more than households do.

In the last three decades “the sectoral composition of global saving has shifted,” wrote Chen (University of Chicago), Karabarbounis (University of Minnesota) and Neiman (University of Chicago-Booth School of Business). “The corporate sector…transitioned from being a net borrower to being a net lender of funds to the rest of the global economy.

“Whereas in the early 1980s most of investment spending at the global level was funded by saving supplied by the household sector, by the 2010s nearly two-thirds of investment spending at the global level was funded by saving supplied by the corporate sector.

“Global corporate saving has risen from below 10% of global GDP around 1980 to nearly 15% in the 2010s,” they observed. “This increase took place in most industries and in the large majority of countries, including all of the 10 largest economies.”

Causes of this shift included global declines in the real interest rate, the price of investment goods, and corporate income taxes and the increase in markups,” the authors wrote. “Further, firms have tax incentives to buy back more shares as saving increases and this leads? to an improvement in the corporate net lending position.”

Multinational firms save the most. “Firms in the group with more than one percent of their income earned abroad display a saving rate that is roughly 4 to 6 percentage points higher than firms with less than one percent of their income earned abroad. Surprisingly, this difference mainly reflects a higher share of gross operating surplus in value added—likely reflecting lower labor shares— rather than differences in taxes or dividends,” according to the paper.

Households have less to save—and presumably less to save for retirement. “The improvement in the corporate net lending position has direct implications about household saving behavior,” the authors wrote. According to their model, the change in the corporate net lending position relative to GDP [implied] a decline in household saving relative to GDP of about 6 percentage points,” which they said is similar in value to the actual decline.  

“Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?” by Ethan Ilzetzki, Carmen M. Reinhart, Kenneth S. Rogoff (NBER Working Paper No. 23134, February 2017). 

On the 2016 campaign trail, there was apocalyptic talk about a U.S. debt crisis, about the chance that the Chinese would stop buying our bonds, and about the possibility that the U.S. might default on its bonds or negotiate to repurchase them at less than par value.

A very different, and less alarming, macroeconomic view of the dollar and the U.S. debt emerges from a recent paper from the well-known Harvard writing team of Rogoff and Reinhart, assisted here by Ethan Ilzetzki of The London School of Economics and Political Science.

In “Exchange Arrangements Entering the 21st Century: Which Anchor Will Hold?” they argue the dollar is, if anything, more important today than when it succeeded the British pound as the world’s reserve currency at the end of World War II.

“The dollar’s dominance as an anchor/reference currency appears to be at least as great as it was under Bretton Woods [1945-1971],” the authors wrote. “Indeed, by other metrics, its global role has expanded even further following the collapse of the ruble zone. The euro is a distant second.”

Rogoff and Reinhart co-wrote 2009’s controversial bestseller, “This Time Is Different,” which argued that a large national debt impedes future growth. In this book, they explain that our large trade deficits and our large national debt largely reflect the burden (and privilege) that the U.S. bears (and enjoys) in providing the world’s reserve currency. The dollar has only become more central, they add, since the collapse of the Soviet Union in 1989 – 1991 and the Asian debt crisis of the late 1990s. 

The dollar supplied much-needed liquidity to the world during the fast-growing ’50s and ’60s. “Given that the world’s gold supplies were not increasing as fast as the demand for reserves [at that time], an expanding share of the world’s reserve assets came to be paper denominated in U.S. dollars,” the authors wrote.

“The rest of the world’s appetite for dollars could be met by the U.S. issuing more dollar debt and selling it to the rest of the world. In the balance of payments, this would require the U.S. to run sustained current account deficits, but more importantly, a fiscal deficit.” 

Conversely, “to maintain the official dollar/gold parity, the U.S. would have had to restrict its supply of dollars and cease to borrow from the rest of the world, that is run a current account surplus, which in the context of the time meant running a fiscal surplus.”

In short, the benefit of having the world’s reserve currency came with the burden of satisfying the world’s growing demand for liquidity and at the cost of domestic deficits and inflation.  

“How Job Changes Affect Retirement Timing by Socioeconomic Status” by Geoffrey T. Sanzenbacher, Steven A. Sass and Christopher M. Gillis (Center for Retirement Research at Boston College, February 2017).

Late-career job changes have become more common in recent years, but does job-hopping at age 53 or 55 (as opposed to staying put) increase or decrease a person’s chances of still being in the workplace at age 65?

At a time when more people need to work longer (perhaps because they under-saved), this question has become more significant. So researchers at the Center for Retirement Research looked into it.

“Since workers presumably change employers to improve their well-being, moving to a job that they consider better could extend their careers,” the CRR’s authors wrote. “On the other hand, job-changing could reduce job security because tenure protects older workers against involuntary job loss, and workers who change jobs risk a bad match. Changing jobs thus could increase the risk of a layoff and an early labor force exit.”

Using data from the Health and Retirement Study(HRS), a biennial survey that follows respondents who are ages 51-61 when they enter the study, the researchers found that, indeed, people who switch jobs voluntarily in their 50s are more likely to be in the workforce at age 65 than people who don’t change jobs. 

“Workers with at least some college who voluntarily changed jobs were 10.9 percentage points more likely to be in the labor force until age 65. For less-educated workers, the effect was 7.5 percentage points,” the analysis showed. The authors conceded that some of the people who left their jobs “voluntarily” might have been “nudged” into quitting. But if that were the case, they said, it would only strengthen the findings.     

“Changing employers involves risks and not all older workers can move to a better job,” they concluded. “But for those who can, a voluntary job-change is associated with a large and statistically significant increase in the likelihood of remaining in the labor force to age 65, regardless of the worker’s educational attainment.”

“The End of Alchemy: A Review Essay by Roger E.A. Farmer” (NBER Working Paper No. 23156, February 2017).

If you don’t have time to read “The End of Alchemy,” Mervyn King’s book (W.W. Norton, 2016) about the Great Financial Crisis (and how to prevent the next financial crisis), you might instead read a recent review of the book, by UCLA economist Roger E.A. Farmer.

In “The End of Alchemy,” King, who was Governor of the Bank of England from 2003 to 2013, argues that a central bank, in the future, should maintain the stability of the banking system by serving as the “Pawnbroker For All Seasons” instead of the Lender of Last Resort. Farmer summarizes King’s proposal as follows:

Under the PFAS, the central bank would require banks and other private financial intermediaries that might need liquidity from the central bank in times of crisis to:

  • Deposit adequate collateral with the central bank in advance. All deposits would be backed either by cash or by guaranteed contingent claims on reserves held at the central bank.
  • Second, the cost of liquidity provision would be mandatory and paid up front.
  • And third, the financial institutions that benefit from emergency liquidity provision would be required to bear the cost in advance.
  • The solution should be implemented gradually, over 20 years, to allow banks to gradually increase their ratios of equity to assets.

Farmer, the author of books on the financial crisis as well as economics textbooks, believes that “The End of Alchemy” overlooks a big problem: The fact that “most of the people we are trading with through the purchase and sale of financial assets have not yet been born.”

That is, transactions that fit today’s circumstances might be disastrous for people in 10 years. Central banks, representing perpetual governments, are the only institutions that can protect them from that risk.

 “The fact that stock market booms and crashes are rational from the perspective of the individual does not mean that they are rational from the perspective of society. The market can remain irrational for longer than you and I can remain irrational. The market can remain irrational for longer than George Soros or Bill Gates can remain solvent,” Farmer wrote.

“But the market cannot remain irrational for longer than the U.S. Treasury can remain solvent. A national central bank, backed by the ability of the treasury to levy taxes on future generations, could make the trades that our children and our grandchildren would make if they were able.”

© 2017 RIJ Publishing LLC. All rights reserved.

Fee-Based FIAs Are Customer-Friendly. But Will They Sell?

Posted on March 2, 2017 by -

Let’s consider the relatively new phenomenon of no-commission fixed indexed annuities (FIAs). These products potentially create significantly more value for investors than traditional FIAs. But it’s not clear if they will prove popular with the people who sell them.

How much more customer value can they deliver? Joe Maringer (below right), national sales vice president at Great American Life, told RIJ, “A good rule of thumb is that there’s approximately a 40% to 50% higher cap [on the no-commission product]. “So if the cap were 4% on our commission product, it would be 6% on our advisory product. Today we have caps on the S&P 500 Index of 7.25% and on REIT Index, 8.25%” on the firm’s no-commission Index Protector 7.Joe Maringer

If investment advisor representatives (IARs) affiliated with registered investment advisor firms (RIAs) charge less than their usual one percent fee on money placed in an FIA, then fee-based FIAs should become a relative bargain for investors who are looking for both safety and upside potential at a time when stocks and bonds are precariously priced at historic highs.

“Since we’re not paying the advisor compensation, we have a larger budget to buy equity options,” Maringer said. “The advisors have the flexibility to charge whatever they believe is appropriate to charge on the contract. If you’re adding an income rider [and the contract will be held for life], one-time commission might be less expensive.”

But if commissions are eliminated, will distributors still want to sell FIAs, which have traditionally offered bigger sales incentives than almost any other widely sold retirement product?

One broker-dealer executive, Scott Stolz of Raymond James, told RIJ this week, “DOL or no DOL, this whole process is pushing more and more advisors to a fee-based-only model.  We have told our insurance companies that they will need a fee-based alternative for those advisors. Even firms that are planning to use the BICE [Best Interest Contract Exemption] and continue to offer commission-based products will find that the advisors will make their own choices.”

Aside from deciding how much to charge on money in an FIA, there are other issues to be resolved before fee-based advisors can start selling no-commission FIAs. If clients buy FIAs with tax-deferred money, RIAs can arrange to take their ongoing fees out of the account without a taxable event for the client. This may require systems changes.

“Our independent RIA customers want the flexibility to take the fee directly out of the contract. With qualified contracts, there’s no taxable distribution because the client isn’t receiving the benefit,” Maringer told RIJ. “With non-qualified contracts, a Form 1099 will be issued on that distribution. You’ll need to use other assets to pay the fees. There’s more to this than people think. We think it’s comical when some [other FIA issuers] say they can just remove the commission from their product, raise the cap and put it out on the market.”

The topic of no-commission FIAs came up this week when Great American Life announced that Commonwealth Financial Network has approved the sale of Index Protector 7 by its advisors. The product, which offers an optional lifetime income benefit rider, was launched in August 2016. Lincoln Financial and Allianz Life have also introduced no-commission versions of their FIAs.

Commonwealth is the nation’s largest privately held independent broker-dealer/Registered Investment Advisor, with about 1,700 producing advisors managing a collective $114 billion or so. Last October, Commonwealth announced that its advisors would no longer accept third-party commissions on the sale of annuities to their clients.

That announcement was a response to the passage of the Department of Labor’s fiduciary rule in June 2016. The rule, now under review (for possible repeal) by the Trump administration, stopped intermediaries from selling commission-paying variable annuities or FIAs to retirement savers—such as rollover IRA owners—without signing a Best Interest Contract and incurring new legal liabilities.

Going forward, any VA or FIA on Commonwealth’s shelf would have to be no-commission. While commissioned Commonwealth advisors sold a large volume of FIAs in the past, it remains to be seen whether they will sell as much in the future if they do not have the incentive of a commission, or if fee-based advisors who have never sold FIAs will choose to sell them.

“Sales have been slower because it’s a whole new educational environment,” Maringer told RIJ. “We’re back to ‘Annuities 101.’ But some firms have sold hundreds of millions of dollars worth of commissioned FIAs. As they move to a fee-based model, that money has to go somewhere. So, while the education process is taking longer than we’d like, the bucket of money is so large that it’s worthwhile.”

© 2017 RIJ Publishing LLC. All rights reserved.

Instead of retirement savings, farmers bank on their land

Posted on March 2, 2017 by -

Farmers tend to work longer than most Americans, and recent statistics show they are farming even later in life, driven by work that is their identity, aided by technology that lightens its physical toll, and spurred by solid profits off record yields, according to a report this week in the New York Times.

According to the Department of Agriculture’s latest census, conducted in 2012, the average age of principal farm operators in the United States is 58 years, up from 50.5 years in 1982. One third are at least 65 years old, and 12% are 75 or older.

Ask baby boomer farmers in Iowa how they are planning for retirement and the likely answer is: They are not. Fifteen percent of Iowa farmers never intend to retire, according to a 2014 farm poll by Iowa State University Extension and Outreach and the state agriculture department.

Another 20% said they plan to eventually semi-retire, continuing to provide some managerial control or labor to their farms. Many do not have a formal retirement fund. The land, they say, is their 401(k). The same independence that drew them to farming characterizes their retirement approach: free of pensions, unions and so-called experts.

“We’re on our own,” one farmer told the Times. “All you have to do is ask for advice, but we don’t.”

Only 49% of Iowa farmers have identified a successor to eventually run their farms, according to the 2014 farm poll. Even those who have selected a successor are loath to pick a retirement date and actively prepare for it.

Many avoid the topic because they equate retirement with mortality. They are quick to relay stories of farmers who died shortly after retiring—presumably, they imply, because of a loss of purpose.

© 2017 The New York Times.

Two long-term care issuers in PA to be liquidated

Posted on March 2, 2017 by -

Petitions to liquidate two long-term care insurance issuers, Penn Treaty Network America Insurance Company and American Network Insurance Company, were approved this week by Pennsylvania’s Insurance Commissioner.

Policyholder claims will be paid through the state guaranty association system, subject to statutory limits and conditions, said Commissioner Teresa Miller in a release.

More than 98% of Penn Treaty and American Network’s policies are long-term care insurance. The two companies have approximately 76,000 policyholders nationwide, with 9,000 residing in Pennsylvania. 

Long-term care insurance issuers ran into trouble in the past few years. According to the release:

“The pricing of these policies for many insurance companies has proved to be insufficient as a result of claims greatly exceeding expectations and low investment returns.  Claims have exceeded expectations due to incorrect assumptions concerning the number of policyholders who would drop their coverage and the number of policyholders who would utilize their policy benefits, as well as the cost of providing those benefits. The pricing deficiencies and resulting financial losses have resulted in many long-term care insurers seeking large premium rate increases and some leaving the market.”

State regulators say they would not have approved a request by the companies to raise premium rates (by over 300% on average), so the state put them into liquidation as the only remaining alternative.

“Policyholders should continue to file claims… and pay their premiums in order to be eligible for guaranty association coverage,” Commissioner Miller said.  In each state, insurance companies licensed in that state pay into a guaranty fund. The fund is used to cover claims when a company becomes insolvent and is liquidated.

Actuarial models predict that about 50% of policyholders of the two companies will have claims in excess of what the guaranty association will pay. Policyholders in Pennsylvania are paid up to the maximum amount provided for by the policy, subject to a cap of $300,000. 

The liquidator and the court will determine whether any payments for claims above the cap can be made from the companies’ remaining assets to any policyholders who may have claims in excess of the cap. 

Guaranty associations may seek to increase premiums, but any rate increase would be subject to approvals required by law which, depending on the state, may include a review process similar to rate requests filed by long term care insurers with state insurance regulators, the release said.

© 2017 RIJ Publishing LLC. All rights reserved.

Consumer coalition rallies against Wells Fargo Bank

Posted on March 2, 2017 by -

A coalition of consumer advocacy groups has launched a national campaign targeting Wells Fargo Bank over its illegal account-opening practices and its forced arbitration policy.

The campaign, based at wedocount.org, also released a letter addressed to Wells Fargo CEO Timothy Sloan calling on the bank to cease imposing forced arbitration on its customers and workers.

The letter said in part:

“We call on Wells Fargo to do the right thing, and to immediately cease using forced arbitration clauses in its consumer and employment contracts. A number of competing banks and credit unions already have decided to respect their customers and workers, and not to deny them their constitutional rights.

“Until Wells Fargo ends its practice of depriving its customers and workers of their constitutional rights as a condition of obtaining products, services, or employment, we will continue to call upon all Americans who value those rights to close their accounts with the bank, and all institutions to divest from Wells Fargo.”

One of the sponsoring consumer organizations, the National Consumers League, said it is withdrawing its working capital, about $1.8 million, from Wells Fargo, closing its account with Wells Fargo in Washington, D.C., and “switching to a bank that does not impose forced arbitration on its customers or employees.”

In April 2016, Wells Fargo admitted to deceiving the U.S. government into insuring thousands of risky mortgages, and paid $1.2 billion to settle a U.S. Department of Justice lawsuit.

In September 2016, the bank apologized to customers, announced steps to change its sales practices, and agreed to pay $100 million to the Consumer Financial Protection Bureau as well as $50 million to the city and county of Los Angeles and $35 million to the Office of the Comptroller of the Currency, according to press reports at the time.

At a teleconference last Monday, two former Wells Fargo customers described personal experiences with the bank’s practices. The groups provided tip on how consumers can switch from Wells Fargo to banks and credit unions that do not impose forced arbitration.

The following groups are members of the coalition:

Alliance of Californians for Community Empowerment
Consumer Action
Consumer Federation of California
Consumers for Auto Reliability and Safety (CARS) Foundation
Courage Campaign
ForgoWells
Homeowners Against Deficient Dwellings
Housing and Economic Rights Advocates

 

Make the Road New York
Montana Organizing Project
National Association of Consumer Advocates

National Consumer Law Center (on behalf of its low-income clients)
Public Citizen
Public Good
Public Justice
Progressive Congress Action Fund
Tennessee Citizen Action
TURN – The Utility Reform Network
Workplace Fairness

© 2017 RIJ Publishing LLC. All rights reserved.