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Lincoln and BlackRock Launch No-Commission Variable Annuity

Posted on February 24, 2017 by Kerry Pechter -

Lincoln Financial Group and BlackRock have collaborated to offer a no-commission, no surrender charge variable annuity for fee-based advisors who want to give clients a source of guaranteed lifetime income and who like using low-cost exchange traded funds. The product is called Lincoln Core Income.

“We’re targeting advisors who haven’t traditionally sold or who have never sold variable annuities, because of their perceptions of the cost, and their questions about whether the guarantees offer value at that cost,” said Dan Herr, vice president of Product Development for Annuity Solutions at Lincoln Financial, in an interview.

“With Core Income, the goal was to bring the cost way down and to align the benefit with how fee-based advisors traditionally tell clients to take income,” he told RIJ. “By guaranteeing a safe, COLA-adjusted 4% income, our solution matches the income method that these advisors typically use today. This also fits into the trend toward passive investments.”

Core Income differs from earlier variable annuities with income riders. Since there’s no commission, there’s no surrender charge period or annual mortality and expense risk fee (whose purpose was to reimburse the insurer for paying B-share commissions). The income rider offers an annual cost of living adjustment of 2% to help income keep up with inflation.

The rider, which must be purchased at issue, costs only 85 basis points per year (capped at 1.50%). There’s a return of principal death benefit option for 75 basis points, for a total expense ratio of about 1.9%. Any advisory fees or platform fees charged by the distributors would be extra.

To control its own risk exposure, Lincoln reserves the right to set the payout rates. For all policyholders age 65 or older, it’s currently 4% (3% if the owner or joint-owner is age 60 to 64 at the time income starts):

“The initial percentages applicable to Core Income Benefit elections are determined in our [Lincoln Financial’s] sole discretion based on current economic factors including interest rates and equity market volatility. Generally, the percentages may increase or decrease based on changes in equity market volatility, prevailing interest rates, or as a result of other economic conditions. This percentage structure is intended to help us provide the guarantees under the rider. The initial percentages for new Core Income Benefit elections may be higher or lower than the percentages for existing Contract owners that have elected the rider, but the percentages for existing Contract owners will not change.”

The client can defer the income start date and have the initially-quoted payout rate be increased by the COLA. For example, if a 65-year-old purchaser was quoted a 4% payout rate at issue but chose not defer income for five years, his or her initial payout rate be over 4.4% (because the 2% COLA compounds) of the principal (minus fees) or of the current account value, if higher.

There are three investment options with annual expenses (including initial waivers) as low as 28 basis points. All are ETFs, which reflects the growing flight toward passive investment options among fee-conscious fee-based advisors:

Lincoln iShares U.S. Moderate Allocation Fund (Standard Class)
Lincoln iShares Global Growth Allocation Fund (Standard Class)
Lincoln iShares Fixed Income Allocation Fund (Standard Class)

It remains to be seen whether fee-based advisors will like no-commission variable annuities, or see the advantage in insuring a 4% payout when the 4% payout itself is supposedly protect against running out of money in retirement. But the approach of the applicability date of the 2016 Department of Labor fiduciary rule—the rule took effect last June—has accelerated the shift among advisors away from commission-based to a fee-based revenue model, and insurers must adapt.

In January, Transamerica announced a no-commission variable annuity with a lifetime income benefit rider. The same month, Jackson National Life announced a fee-based version of its popular Elite Access variable annuity, which offers access to so-called liquid alternative investments but doesn’t offer an income rider.

Core Income, however, “has nothing to do with the Department of Labor’s fiduciary rule, although it will only help this product if that rule goes through,” Herr told RIJ.

‘A Dangerous Time in History’

Posted on February 23, 2017 by Michael Gayed -

We have entered a dangerous time in history. A time when the truth changes every day.

The amount of misinformation being spread daily is nothing short of remarkable. It seems like everything is “fake news” now, independent of who reports it. Rather than seek out the truth, confirmation bias results in the spreading of lies with little thought as to whether one’s existing beliefs are rooted in reality, or are complete fantasy.

What is worse is that the speed with which this misinformation is spread trains our brains not to use Kahneman’s “System 2” part of the mind (which is analytical). Rather, everyone now simply reacts and moves on to the next distraction.

What does any of this have to do with investing? Absolutely everything.

At some point, the market prices in the actual truth, but only after overreacting in both directions. In between those two points, buy and sell decisions are made based on reactions not only to the recent past, but also to the narrative constructed around it. It is far easier to react to something that sounds like it makes sense rather than to think about nuance—or even ask if the information presented is fiction or non.

The narrative now in the investment community is remarkably void of any questioning of logic, or of any actual information. Interest rates will only go up, stocks will only go up, inflation is going to skyrocket, and volatility is going to remain historically low.

Why does everyone believe this is the future? Because interest rates have already gone up, stocks have already gone up, inflation has already gone up, and volatility is historically low.

The narrative reacts to what has already happened, and spreads like wildfire across the media. Investment decisions are then based on the story, rather than the fact that mean-reversion dictates the exact opposite.

Yes, rates may go up, stocks may go up, inflation may skyrocket, and inflation may go up. But realistically, it is hard for any of these to continue the way investors believe.

Why? Because the narrative is predicated on Trump being a reflationary president through tax cuts, infrastructure spending, and regulatory reform.

My biggest problem with this is that 1) Seemingly everyone believes that this is a certainty, and 2) Seemingly no one is addressing the not-so-alternate-fact that the current fiscal year-end 2017 US federal government debt is estimated to be $20.1 trillion. And that’s before any new legislation is passed. If Trump has his way, the size of that debt will explode.

Somehow, disturbingly, no one is discussing the potential that tacking on even more government debt is long-term deflationary (see Japan), represses long-term growth (since you’re pulling it forward), and tends to increase overall asset volatility.

But who cares, right? Someone says something we agree with that confirms our own biases and beliefs, and it only reinforces our belief that what we think is true. Independent thought is impossible when we’re inundated with information that confirms what we think, rather than what is actual reality. And when those beliefs are proven false, a new narrative is constructed to fit a new set of beliefs—which are again based on recent events.

We must, as investors (but more importantly as members of society), stop changing the truth to fit the moment. We must stop reacting to every bit of information and instead make sure the information is valid. We must stop believing in false narrative. Perhaps most importantly, we must stop doing this to ourselves.

Will Trump Derail the Fed’s Game Plan?

Posted on February 23, 2017 by Stephen Slifer -

For the past eight years the Fed has been the driving force behind the economic expansion. But now President Trump has an unprecedented opportunity to re-shape the Fed’s Board of Governors. There are currently two vacancies on the Board. Fed Governor Dan Tarullo, who has been the Fed’s point man on financial regulation, intends to resign in the spring. Fed Vice Chairman Stanley Fischer’s term ends in June. And Fed Chair Yellen’s term ends in January of next year. That means that President Trump will have the ability to appoint the next Fed Chair, Vice Chair, and three Fed governors within a year. How might that alter the Fed’s conduct of monetary policy? Probably very little.

The markets currently fear that President Trump’s push for wildly stimulative cuts in individual and corporate income tax rates will produce much more rapid GDP growth and trigger a re-emergence of inflation. If so, the Fed would need to raise rates far more quickly than it currently envisions which could be the catalyst for the next recession. That fear is overblown. Despite changes in Fed leadership the Fed will continue on a slow but gradual path towards higher interest rates, the economy will continue to expand for several more years, and the expansion will ultimately go into the history books as the longest expansion on record.

As the economy swooned in 2008 the Fed lowered interest rates to a record-setting low level of 0%. But now the Fed has decided the time has come to embark on a slow but steady path towards higher short-term interest rates. Why? Because it needs some leeway to lower rates at that point in time when the recession ultimately arrives. The Fed envisions the federal funds rate reaching a “neutral” level of 3.0% sometime during 2020. The direction of rates is clear regardless of who sits in the Fed Chair’s seat.

The second step in the Fed’s easing process in the wake of the recession was “quantitative easing” whereby it purchased U.S. Treasury bonds and mortgage-backed securities. In the process it flooded the banking system with more than $2 trillion of surplus reserves. Those “excess reserves” represent the lending ability of the U.S. banking system. If banks suddenly become willing to lend at the same time that consumers and businesses become more willing to borrow, those excess reserves could fuel an unprecedented, and highly inflationary, spending spree. Ultimately, those surplus reserves must be extinguished. One way to do that is to allow some of the Fed’s holdings of Treasury and mortgage-backed securities to mature and not be replaced. But such action is as contractionary as its bond buying spree was stimulative. To let securities run off at the same time that the Fed is raising short-term interest rates is not a good idea. While the Fed needs to shrink its balance sheet, this process will probably not begin for another year. But it is going to happen regardless who the Fed Chair might be.

The most important pick for President Trump is obviously the Fed Chairman. He could re-appoint Janet Yellen, but given his comments during the campaign about how she and the Fed were keeping interest rates artificially low in an attempt to support Hillary Clinton and the Democrats, the odds of that happening seem quite low.

The biggest challenges for the new Fed chair will be the speed with which interest rates will rise, and how soon the Fed will begin to shrink its balance sheet. It is not going to sit idly by and let the inflation rate climb. Why? Because in the past the Fed has let inflation get out of control and it paid a price for doing so. In the 1970s, the economy overheated and the Fed (under Arthur Burns) refused to raise rates high enough or fast enough to prevent an upsurge in inflation. Ultimately, Paul Volcker had to push the funds rate above the 20% mark to break the back of inflation. The Fed will not let that happen again—regardless of who is in charge.

Keep in mind also that while Fed governors and the Fed chairman may change, the Board’s staff does not. These are people who have chosen a career at the central bank and are, in our opinion, extremely smart, capable and dedicated individuals. We have the greatest respect for the Board staff and are quite comfortable having it oversee the process of implementing monetary policy.

Some would like the Fed to implement a “rules-based” policy whereby rate changes are determined by formula rather than what some see as a rather arbitrary decision-making process. We strongly disagree with that concept. Models are based on history. As long as the structure of the economy does not change they may work well enough. But the economy is dynamic and constantly evolves.

During the Great Recession consumers and businesses reassessed their attitude towards debt and are far less willing to hold debt today than at any time in recent history. Technological changes have made the economy far more reliant on the service sector today than in the past. Financial developments can result in never-before-seen instruments whose impact on the economy are unpredictable in advance. Reliance on a simple model to determine the course of monetary policy would be a disaster.

In our view, tax cuts of some magnitude will be adopted this year. However, with the prospect of $1 trillion budget deficits looming by the end of this decade President Trump will be unable to get Congress, or even Republicans, on board for untethered tax cuts. Some offsets in the form of reduced government spending will be required to temper the impact of the tax cuts. Hence, the economy will receive only mild stimulus this year, and the resultant increase in inflation should be relatively small.

Thus, regardless of changes in future Fed leadership, monetary policy for the next several years will not change much from what was described earlier—a moderate increase in interest rates followed by an eventual runoff of Fed holdings of U.S. Treasury and mortgage-based securities. If those things happen gradually the expansion is poised to become the longest expansion on record. It will hit the 10-year mark by June 2019. If the Fed can engineer a record-breaking length period of expansion, why in the world would anyone want to tinker with the process?

Indexed annuity sales hurt by fiduciary rule: LIMRA SRI

Posted on February 23, 2017 by Editorial Staff -

Despite tailing off in the fourth quarter, total fixed annuity sales hit a record-breaking $117.4 billion in 2016, 14% higher than in 2015 and nearly $7 billion higher than 2009 (when sales were last at their highest), according to LIMRA Secure Retirement Institute’s Fourth Quarter U.S. Annuity Sales survey.

Fixed annuities finished the year poorly. Total fixed annuity sales fell 13% to $25.7 billion in the fourth quarter compared with the same quarter in 2015. Sales of fixed-rate deferred annuities, (book value and MVA) fell 9%, to $7.7 billion. Fixed indexed annuity (FIA) sales fell 13%.

“We have noticed FIA sales have declined quarter over quarter since the Department of Labor (DOL) reclassified FIAs under the best interest contract exemption. Until there is some clarity on the DOL fiduciary rule, the Institute expects sales to continue to drop in 2017,” said Todd Giesing, assistant research director, LIMRA Secure Retirement Institute

But fixed-rate deferred annuities nonetheless finished 2016 up 25%, at $38.7 billion, and FIAs hit record levels in 2016, up 12% to $60.9 billion. The Institute expects sales to rebound in the first quarter 2017, responding to the post-election interest rate spike late in 2016.

“This marks the ninth consecutive year of growth for FIAs,” Giesing said, but noted that fixed-rate deferred annuities saw the biggest gains of the year, rising 51% in 2016 from 2015.

“Unlike the last several years where indexed annuities propelled overall fixed annuity growth, in 2016, fixed-rate deferred was the primary driver of fixed sales in 2016. A large block of fixed-rate deferred annuities purchased in 2009 came due in the first half of the year, creating a significant amount of money in motion,” he said.

Despite the 85 basis point jump in the 10-year Treasury interest rate, fixed immediate annuity sales fell 23% in the fourth quarter to $2.0 billion. In 2016, fixed immediate income annuities grew 1% to $9.2 billion. Deferred income annuity (DIA) sales fell 30% in the fourth quarter to $575 million. Year-over-year, DIA sales increased 4% to $2.8 billion.

Total annuity sales were $51.0 billion in the fourth quarter, falling 17% from the prior year. This is the third consecutive quarter of decline in overall annuity sales and the lowest quarterly sales since the first quarter 2002. For the year, total annuity sales fell 6% to $222.1 billion.

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

VA sales were below $30 billion every quarter of 2016. Sales totaled $25.3 billion, down 20% in the fourth quarter from the same quarter in 2015. In the fifth consecutive year of VA sales declines, total sales were $104.7 billion in 2016, down 21%, or $28 billion, from 2015. VA sales are nearly $80 billion lower than their peak in 2007 and are at lowest level since 1998.

“Aside from the DOL fiduciary rule, one of the factors driving VA sales declines has been a drop in sales of products with guaranteed living benefit riders,” noted Giesing. “LIMRA Secure Retirement Institute is expecting sales of variable annuities with a GLB rider to be around $50 billion in 2016. This is a decrease of nearly $20 billion from last year, and a drop of over 50% from just 5 years ago.”

To view LIMRA’s fourth quarter results, visit 2016 Annuity Industry Estimates. To view variable, fixed and total annuity sales over the past 10 years, visit Annuity Sales 2007–2016. The Institute said it will release the top 20 annuity manufacturer rankings in mid-March, following the last scheduled earnings release from survey participants.

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

Trump rally takes unexpected direction: Morningstar

Posted on February 23, 2017 by Editorial Staff -

Although the Trump administration’s promises of tax cuts and infrastructure spending spurred confidence in U.S. equities in late 2016, investors directed most of their money to fixed-income and international equity funds in early 2017, according to Morningstar’s mutual fund and exchange-traded fund (ETF) asset flow report for January.

In January, investors put $30.6 billion into U.S. equity passive funds, down from $50.8 billion in December 2016, the report showed. On the active side, investors pulled $20.8 billion out of U.S. equity funds during the month.

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

Highlights from Morningstar’s report about U.S. asset flows in January:

Following investors’ preferences for equities after the U.S. presidential election in November, investors are back to fixed income at the start of 2017, contributing $36.5 billion to taxable-bond and municipal-bond funds. January flows into U.S. equity were diminished, but remained positive with total flows of $9.9 billion. International-equity flows increased to $16.5 billion on the heels of encouraging economic data from Europe.

Typically, traditional bonds do not perform well in an environment of rising interest rates, yet investors still chose taxable-bond funds in the month following the federal interest rate increase in December with total inflows of $32.2 billion.

Morningstar Category trends for January show both large-blend and mid-cap blend in the top five, although their inflows all came on the passive side, mitigated by outflows on the active side. Among fixed-income categories, bank loans joined intermediate-term bond in the top five, with inflows of $4.1 billion on the active side.

Vanguard has dominated the asset management industry in terms of inflows for the past two years, as it attracted positive and increasing flows while the rest of the industry sank into outflow territory. In 2016, Vanguard alone attracted $1.1 billion of investor money daily.

Among active funds, PIMCO Income, which has a Morningstar Analyst Rating of Silver, attracted the largest inflows, $1.6 million. Bronze-rated PIMCO Total Return suffered the largest outflows, $1.6 million in January.

Despite sizable outflows from the allocation category group, Silver-rated American Funds American Balanced is second in the top-flowing five funds in January because of its consistent performance, garnering $915 million in the month. This fund was on the top-flowing list consistently in 2016.

Among passive funds, SPDR S&P 500 ETF was the fund with the largest outflows in January of $3.3 billion, which is typical of the fund’s flows pattern each year.

For more information about Morningstar Asset Flows, visit.

Perhaps with less to spend, retired Southerners spend less

Posted on February 23, 2017 by Editorial Staff -

New research by the Employee Benefit Research Institute (EBRI) shows large variations in spending by older households across the country, including differences between large U.S. Census regions (e.g., the Northeast vs. the South) and smaller divisions (such as New England vs. South Atlantic states).

Specifically, looking at variation by total household spending:

Among 65-to-74-year-olds, Northeastern households had the highest median annual spending ($41,860) and Southern households the lowest ($32,836). Among the different census divisions, New Englanders ages 65 to 74 spent the most (median of $46,019), while peers in the West South Central division (TX, OK, AR, and LA) spent the least ($28,540).

Geographic differences in housing and housing-related expenses were consistent with total spending differences. New England households ages 50 to 64 spent almost 2.5 times more (annual median of $30,240 ) on housing and housing-related expenses than those in the southern states of TX, OK, AR, and LA (annual median of $11,948).

Midwestern states have much higher health care expenses than other regions for those ages 75 and above and non-institutionalized. Among those 85 and above, the median annual spending among Midwesterners was $3,480, which was 41.5% more than the median ($2,460) in the next-highest spending region (the West).

Nationally, average household spending declined with age. In 2015, average total annual spending for households between ages 50 and 64 was $53,087, but only $34,982 for those ages 85 and older. Median spending levels for the same age groups were $42,235 and $26,497, respectively. Housing and housing-related expenses remained the largest spending category for all age groups above 50, varying between 44% and 48% of total household spending for different age groups.

The full report, “Geographic Variation in Spending Among Older American Households,” is published in the Feb. 21, 2017 EBRI Issue Brief, online at www.ebri.org.

Steep drop in fintech investment: KPMG

Posted on February 23, 2017 by Editorial Staff -

Political and regulatory uncertainty, a decline in megadeals and caution among investors contributed to a steep drop—to $12.8 billion in 2016 from $27 billion in 2015—in total funding for U.S. fintech companies and deal activity, according to KPMG’s Q4 2016 “The Pulse of Fintech” report.

Globally, fintech funding fell to $25 billion in 2016 from $47 billion in 2015. Nonetheless, 2016 was the third strongest year for fintech investment and second highest year for venture capital (VC) fintech investment.

M&A and VC investments totaled 489 deals in 2016, down from 615 deals in 2015. Total VC investment in the U.S. dropped to $4.6 billion in 2016 from $6 billion in 2015, while M&A activity fell to just $8 billion in 2016, down from $21 billion in 2015.

The median deal size increased year-over-year for both seed rounds and early-stage VC deals. In addition, massive late-stage fintech financings contributed to keep total deal value healthy.

Total investment retreated to its lowest level in five years and there was a year-over-year decline in M&A. But private equity deal count rose to an all-time high, and deal value remained stable when compared to pre-2015 annual results.

Fintech Corporate VC activity represented 18% of all fintech venture financings in the U.S. in 2016, the biggest share in the past seven years.

“Because valuations have corrected, the market has set up a perfect storm for IPOs and M&A to happen in 2017,” said Brian Hughes, co-leader, KPMG Enterprise Innovative Startups Network and national co-lead partner, KPMG Venture Capital Practice, in a release. “An increasing number of exits will likely stimulate demand for new investments.”

KPMG identified these trends:

Insurtech. Interest in “Insurtech” rose significantly in 2016, with the introduction of smart contracts, currency exchange, and other applications in financial services.
Blockchain. Investors are watching blockchain closely. During 2016, a number of blockchain projects and proof-of-concept initiatives were conducted, but investors want more evidence that the technology can be applied in “effective, scalable and profitable solutions.”
Robo-advice. Robo-advisory has been a strong area of fintech investment over the past few quarters. While robo-advisory has primarily been envisioned as a way to reach Millennials, the technology is now evolving to become more accessible to other clients.

‘We’re the Kasparov Inside’

Posted on February 16, 2017 by Kerry Pechter -

Still essentially a TAMP—a turnkey asset management platform—Envestnet has in the past few years grown through acquisition to become perhaps the largest single provider of cloud-based wealth management software to tens of thousands of advisors at independent, bank-owned and insurer-owned broker-dealers and registered investment advisors (RIAs).

By scooping up firms like Tamarac, Yodlee and others, the Chicago-based, publicly held (since 2010) firm has steadily increased the breadth and depth of its menu of technology solutions that enable broker-dealers and RIAs to outsource almost any of their middle- and back-office portfolio management, research, administrative or client relationship management chores.

Envestnet was, in a way, the first white-label robo-advisor for advisors. Its chairman, CEO and co-founder, Judson Bergman, saw earlier than most that a robo-human hybrid model is the most efficient way to offer fee-based, fiduciary, mass-customized financial advice in the advisor-mediated space. In that equation, his company delivers the automated, software-driven, algorithmic half and wealth managers provide the consultative, client-facing, rainmaking human side.

“What people don’t do well, computers excel at,” Bergman told RIJ recently. “What we’re good at, they’re lousy at. Experts plus machines are better than machines alone or experts alone. This principle inspires me.”

If you’re not familiar with Envestnet, that may be because it’s a behind-the-scenes technology provider like Intel, not a consumer brand. “Envestnet is the ‘Kasparov Inside.’ Or rather, we’re the technology inside the future Kasparovs of wealth advisory. We enable the experts,” Bergman said in the interview.

Alois Pirker, an analyst at Aite, has followed Envestnet for several years. “They’ve consolidated the TAMP market. There still are other TAMPs. But if you go back 10 years, there would have been a ton more TAMPs than today,” he told RIJ.

“There will always be firms that build in-house, like Merrill Lynch and the other wire houses, but that space has narrowed. Very few firms have that luxury to build within. Others have chosen to differentiate in the way they communicate rather than by maintaining their own platform.

“Envestnet had always been in the broker-dealer space,” Pirker continued. “That’s the core area for TAMPs. The acquisition of Tamarac put them in the RIA space. Their other category of acquisition is less about gaining market share in our core market and more about evolving into new areas. Their biggest acquisition so far has been Yodlee, which is heavily focused on the bank space and the data aggregation space.

“That’s expanded their turf quite a bit. Aggregation is a key capability because businesses want to provide holistic services. The digitization of the industry means that the client portal is front and center, and Yodlee already has a strong position on the client portal,” Pirker said.

Bergman, a former managing director at Nuveen Mutual Funds (who with Nuveen colleague Jim Lumberg founded Envestnet in 1999), grew up in the same Minneapolis suburb as Sen. Al Franken and New York Times columnist Tom Friedman, attended Wheaton College and earned his MBA at Columbia. In an interview at his office on E. Wacker Drive in Chicago (across the Chicago River from a tall silver skyscraper bearing the surname of the new president of the United States in giant letters), he spoke with RIJ about fintech, advisor fiduciary obligations and how the two fit together.

RIJ: Envestnet is now a serial acquirer of other companies, most notably of Yodlee for $590 million in 2015. What’s the motivation for these purchases?

Bergman: The motivation is a conviction that wealth management is rapidly changing from an investment-centric process to a financial-planning-and-wellness-centric process. That means advisors who intend to act as fiduciaries must deliver plans that demonstrate knowledge of the customer. That means more data. It means stronger capabilities in related areas, like tax planning.

We want to equip and enable the advisor of the future to become a symbiotic advisor, on the assumption that persons-plus-machines is better than either alone. The goal is to enable advisors to take advantage of the best technology, to depend on Envestnet to do the routine tasks that aren’t necessarily value-added—CRM; research, to a degree—and to give them automated know-your-customer capability around their clients’ liabilities, spending needs, goals and objectives for retirement and health care.

Our purpose is to enable advisors to go from being investment advisors to being wealth advisors, to being the expert in the middle of a complex technological and economic eco-system. That’s a tall order.

RIJ: Envestnet used to be one of many TAMPs. Why did it emerge from the pack? What made it different?

Bergman: We were the first web-based managed platform. We were in the cloud before it was called “the cloud.” At the beginning we did demonstrations of our technology. Prospects said, “Let me see how you do research, proposal, account rebalancing,” and we did demos. Then they said, “When can you install it?” We said, “What do you mean? We host it.”

RIJ: At the time, that must have required some explanation.

Bergman: I’ve been on the bleeding edge as much as I’ve been on the leading edge, and it’s not always a comfortable place to be.

At the time, firms still had firewalls around installed enterprise software. That was starting to break down by 2003, 2004 and 2005. So we were the first TAMP to unbundle asset management from technology and we were the first to have a tablet-enabled platform. That drove a lot of adoption.

As early as 2003, you could use us like a TAMP and get an outsourced chief technology officer, chief information officer and chief operations officer, or you can just get the technology, like billing or reconciliation. We blew up the TAMP business.

We recognized that there are different buyers. There are the high-end RIAs, who consider themselves to be the ‘chief executive officers’ and ‘chief investment officers’ of their firms. Bundling asset management makes no sense to them. They want enabling technology for CRM or billing or administration. Providing a full range of services is still a significant part of our revenue, but more of the revenue comes from à la carte offerings or bundled à la carte offerings. You can get the vegetables and the appetizer, and skip the aperitif or dessert.

RIJ: What does that mean for the individual advisor and his or her clients?

Bergman: Traditionally, a financial plan was built after weeks or months of gathering data—literally boxes of paper records, check stubs, check registers. The client gives that to the planner, and once the plan is done it has a shelf life of a few months or a year. The process is highly labor-intensive and very inefficient. You’ve got data aggregation and analytics plus net worth applications and budget applications that all feed into the financial planning activity, which drives the investment programs that serve the clients’ goals and fit their risk tolerance. Today, much of the work could be done through automation. And to do all that in real time…this is our vision of how advisors can add value in a fiduciary standard world.

RIJ: Did you predict that there would be a push for a fiduciary standard?

Bergman: I can’t claim that we saw the fiduciary rule coming. What we saw, from the founding of the company, was the trend to fee-based advice. It’s been 17 years since then, and there’s still more commission-based business than fee-based. But we got the trend right. If, when we started, someone with a crystal ball had told me that 17 years later there would still be more commission-based business than fee-based business, I would have said, ‘Maybe we shouldn’t do this.’ We saw it, but we were early. As for the outsourcing of advisor technology, anybody could see that. But we acted.

RIJ: When did you start positioning yourself as a provider of fiduciary compliance services?

Bergman: Originally, most of our enterprise clients had broker-dealer businesses, and followed a suitability standard. So they weren’t buying fiduciary support. Then, in 2014, advisors to 401(k) plans had to disclose if they were agents or fiduciaries; that was the first DOL ruling. That was a meaningful change, so we put together our retirement solutions business and launched that.

At the same time, we saw that the fiduciary standard, if it were adopted, would have broad implications for how the typical advisor ran his or her business. If you’re following a suitability standard, you don’t need to know as much about the client. The fiduciary standard means that people who are investment experts, who do just asset allocation and vehicle selection, in order to succeed in a fiduciary world, will have to be able to plan, coach and be aware of tax and estate issues.

We saw that the path forward was to empower advisors with sophisticated enabling technology that spanned the fiduciary services continuum—data aggregation, financial planning, analytics, portfolio management tools, on-boarding tools, product access, billing, performance reporting—and tied it all back to the objectives of the financial plan. In a DOL world, it’s the only way to turbo-charge advisor productivity. It’s a warp speed accelerator of client on-boarding, and a quantum enhancement of the advisor’s ability to understand the client.

RIJ: Where did the Yodlee acquisition fit into the picture?

Bergman: When we bought Yodlee, people said, ‘What’s so wrong about your business that you had to buy them?’ We said, ‘You’ll see how it makes sense when the fiduciary standard is adopted.’ Now people say it wasn’t so stupid. Data aggregation turbo-charges on-boarding and productivity. Data portability is part of client freedom. If you can do it in a secure and trusted way, it can create many benefits.

RIJ: What are some of those benefits?

Bergman: For instance, we can forecast when clients will have an overdraft or when they will have the ability to save more. In the hands of a trusted advisor, this creates opportunity for better outcomes—better returns, better outcomes for retirement. One result of it is higher share of wallet, but advisors get that on the backswing. Capturing a bigger wallet share is a result of, but not the purpose of, data aggregation. The purpose is that it gives the trusted advisor and the investor a real time picture of the client’s finances. How else do you demonstrate that you understand the client, except by looking at not just assets but also liabilities and spending?

RIJ: The passage of the fiduciary rule last year wasn’t exactly welcome news for your broker-dealer clients, though.

Bergman: When the DOL rule was first announced, our clients were evidencing the stages of the Kubler-Ross syndrome: Denial, grief, anger, etc. The attitude is coalescing toward acceptance. Some companies are focusing on basic risk-mitigation. Others are making fundamental changes to their business models. Those who have been fiduciaries all along, are asking, ‘What does this mean to me in terms of on-boarding, documentation, oversight, or fulfillment? If I’m a fiduciary, how do I document that?’ And the responses vary, depending on whether you’re an RIA or a trust officer or an insurance agent or a broker-dealer rep.

RIJ: Now, with the results of the presidential election, the fiduciary rule is in jeopardy. How are you and your clients reacting?

Bergman: A typical response has been, ‘We have to be ready but if something changes we won’t proceed as quickly.’ The election doesn’t change our strategy, which is fiduciary support. Whether the DOL rule is enacted or delayed, most of our client base has concluded that using a fiduciary standard is a better business model. There’s been a range of responses from our clients. Banks and insurance companies have had a longer lead-time and they’re a little more risk mitigation-oriented. They’ve concluded that it’s too risky to wait and see. At this point [mid-January], they’re assuming that it goes into effect in April.

Without a crystal ball on political stuff, it makes more sense to ask: Which firms and advisors will make it a priority to work by a fiduciary standard? Our major enterprise clients are building some flexibility into their rolling out processes. They want to be prepared to go, but they’re also prepared to slow it down if that’s what happens.

RIJ: Shifting gears a bit: As automation and outsourcing to a firm like Envestnet allows advisors to serve more clients, do you think advisory firms will employ fewer advisors?

Bergman: Over 100% of the growth in the RIA business is accruing to advisors with over $500 million under management. Those with less are losing share. That’s a fact. Yes, there will be fewer advisors and the most successful will have characteristics that are benchmarkable. Certain practice patterns are emerging. Those that grow will make effective use of integrated wealth management technology. The facts bear those trends out over the last five or six years.

RIJ: Broker-dealers and RIAs are known for specializing in wealth accumulation rather than decumulation. Do you see that situation changing?

Bergman: Of the firms that have chosen to leverage our product and technology, some have focused on retirement income, but it’s not a majority. We serve over 50,000 advisors at over a thousand organizations. Some organizations are huge. Some are sole practitioners. Most of them haven’t had retirement income as their primary focus. That may not change dramatically, but more and more of them will see retirement income as an important dimension of their practice.

RIJ: Envestnet’s share price has seen some volatility over the past couple of years. What underlying story does that tell?

Bergman: In late 2014, despite what anyone tried to do to stop it, there were momentum investors that came into our stock because our top-line and cash flow numbers were growing at an accelerating rate. When that happens to a small-cap company, you get investors without a solid understanding of the fundamentals. We tried to make it clear that our acceleration was in part because of the strong market—that it couldn’t continue. And it didn’t. The market was flat for much of the next year. As revenue and growth slowed, there was a change in the market’s perception of the company. I don’t know many entrepreneur-founders who think their stock is overvalued, but we’ve been overvalued and we’ve been undervalued. Since we’ve gone public, our revenue has increased eight- or nine-fold. Cash flow has risen by a similar amount. That’s a strong indication that clients want our services and technology.

RIJ: In manufacturing, they’ve talked about ‘mass customization.’ Do you think that information technology is going to be able to deliver mass customization in the world of investment advice?

Bergman: Individuals increasingly want solutions—portfolio or retirement solutions—that are personalized. The successful organizations in this space will be able to offer personalized financial plans that go beyond considerations of age, beyond risk-tolerance questionnaires, and beyond projections of net worth at retirement. Plans will include behavioral aspects and considerations that go far beyond traditional risk analysis. Advisors will be able use smart, learning-adaptive algorithms to provide more personalized investment solutions for clients.

RIJ: Even for mass-market clients?

Bergman: As they perfect the technology, they’ll be able to do that for individuals of lower net worth than they can now. It’s difficult today for investors with less than $500,000 to $1 million to get that level of personalization. I expect that technology, with an expert in the middle, will be able to lower those wealth thresholds to maybe $100,000 or lower. You’ll see personalized plans for not just the mass affluent, but also for the mass market. That’s how we think about the future. It’s all pointing toward greater personalization at lower levels of net worth.

A Safe Harbor is in Jeopardy

Posted on February 16, 2017 by Kerry Pechter -

Last week, congressmen from two red states introduced joint resolutions that would stop workers in blue states and cities like California and New York from getting access to tax-deferred, auto-enrolled salary-deferral savings plans where they work—if their employer doesn’t otherwise offer such a plan. Those bills were passed by the House of Representatives this week.

The bills, H.J.R. 66 and 67, from Tim Walberg (R-MI) and Francis Rooney (R-FL) would kill the rule passed by the Department of Labor last August (and amended last December to include local municipalities), which created a “safe harbor” that ensured that states and municipalities could set up auto-IRA programs without the programs becoming regulated by the Department of Labor or being subject to the burden of U.S. pension law, ERISA.

With little or no public discussion, we’ve now seen attacks on two DOL initiatives that underwent a great deal of review: the fiduciary rule for advisors and the ERISA safe harbor. Are Social Security and Medicare next?

RIJ believes that these joint resolutions, and the sudden change in direction that they indicate, are wrong. All employees, regardless of their employers’ preferences and no matter how small their company, should be able to access tax-deferred savings programs at work, just as employees at large companies do. In the absence of effective federal action, states and cities have a right and duty to try to close the savings gap.

Private industry hasn’t solved the workplace savings plan coverage gap. Workers need salary-deferral savings programs at work, because few people take the initiative to save for retirement in traditional IRAs.

Millions of workers are failing to save for retirement, which will increase their need for help from Medicaid and other federal programs if they run out of money in old age. A publicly sponsored program in the U.K., called NEST, showed that such programs are necessary, effective and disproportionately help underserved minority and low-income workers.

The plans—almost exclusively in states with Democratic legislatures like California, Connecticut, and Oregon—would allow individual workers to contribute automatically to IRAs. The savings would be invested in U.S. government bonds until the balances became large enough to transfer to a fund company. Participants would be auto-enrolled but could drop out of the plans if they wish.

There’s nothing wrong with government bonds for new savers; small account owners have little to gain from higher risk exposure. For new plan enrollees, it’s more important to create a savings habit than to worry about upside potential.

There’s only one reason to kill the state and local initiatives in their cradles: To make sure that no “public option” might crowd out private options, such as agent- and broker-sold 401(k) plans. But there’s no evidence that public plans will do that.

The Department of Labor considered the crowd-out issue and rejected it, reasoning that 401(k) plans offer richer benefits (such as higher contribution limits and richer tax benefits, especially for business owners and highly-compensated executives) than auto-IRAs. It’s been observed—even by Brian Graff, CEO of the American Retirement Association—that auto-IRAs could even be a stepping-stone to a 401(k) plan for many small employers.

Given the retirement savings shortfall in the U.S., estimated by EBRI at $4 trillion, the nation can’t afford to deprive millions workers in small businesses the same chance to save for retirement on a tax-deferred basis that workers in large plans take for granted, just to ensure that brokers and agents don’t have to compete against even a relatively weak public alternative.

The privilege of tax-deferral should be available to all, and not dependent on the whims of employers. We shouldn’t deprive workers of “bread” on the chance that brokers will be able to sell “cake” to their employers.

How Ticos Turn DC Savings to Income

Posted on February 16, 2017 by Kerry Pechter -

Jason is not a typical Costa Rican, but his story is instructive. A computer engineer by training, the 28-year-old, who is fluent in English, used to write code at the factory of a U.S. electronics giant here. He was well paid by local standards (the median income here is under $15,000). But like many Costa Ricans, he accumulated a lot of credit card debt.

He decided to drop out. Unhappy at work and unwilling to lead a dog’s life of quiet desperation, he quit his job. Before or after that, he pierced his face, tattooed his forearms and gauged his earlobes. When his revolving debt became unsustainable, he defaulted. Under a friend’s name, he opened a drug paraphernalia shop. The day I met him, he was sitting on a box outside his store, reading a book and smoking.

Retirement is too distant for Jason (not his real name) to imagine. But, like many of his U.S. contemporaries, he doubts that his country’s pension system will be solvent when he reaches age 62—or 65, or 70, or whatever the full retirement age might be then. As a self-employed person, he may or may not be contributing to the mandatory DC system. Like everyone else here, he knows from the media that U.S. ratings agencies have reduced his country’s bond ratings to BB and that Costa Rica’s national defined benefit pension, the IVM, is on the verge of “collapse.”

“I expect there to be a financial catastrophe here in about five years,” he told me. Sounding like a Millennial in the U.S., he added, “By the time I retire, I don’t think there will be any benefits for people like me.”

The Costa Rican DC system, or ROP

Jason, of course, is not a pension expert or an economist. But his comments were not so different from what I heard from Hector Maggi Conte (right) and Sugey Gomez Cortez, the managing director and commercial director, respectively, of the OPC CCSS, one of the six Complementary Pension Operators (OPC), that run the money in the “ROP,” Costa Rica’s mandatory defined contribution plan. It was set up in 2000 to supplement the IVM, which, thanks to the country’s falling birthrate and increasing lifespans, faces either major reforms or insolvency.

The DC system here resembles ours in some ways but not in most. Contributions here are deducted from salaries and the system covers about half of the working population. It is relatively new; ours (excluding TIAA) dates to the 1980s.

Unlike our DC plans, Costa Rica’s is mandatory and has a fixed contribution rate (4.25%). Participants may contribute more, but most don’t. “Most Costa Ricans don’t want to save voluntarily in the OPCs,” Maggi told RIJ. “They don’t feel confident in the private pension companies. Also, the plan was never explained properly. A lot of people think the money will just fall from heaven when they retire, but that’s obviously not true. You need to save in order to have the best retirement.”

The money is inaccessible prior to retirement, except in the cases of disability or death. Each person has an individual account with an individual balance that grows over time. The accounts are merely notional, however. Participants don’t choose from among a range of mutual funds or manage their own money. Fund managers at the six OPCs do the investing, according to the restrictions established by a Superintendent of Pensions. Fees are fixed, uniform and low; the expense ratios in small and large plans are equal.

Turning accumulation into income

The OPCs invest cautiously. The OPC CCSS (a branch of the Costa Rican Social Security Fund or “Caja”) invests only about 2% of its assets in U.S. mutual funds, Maggi told RIJ. Its holdings include Vanguard’s S&P 500 ETF, State Street Global Advisors Health, Energy and Technology ETFs, and Franklin Templeton funds. The selections are based on information from Morningstar and Bloomberg.

“We need to know when to get in and when to get out,” said Maggi, voicing the concern of a publicly-employed pension fund manager who will likely face heavy criticism from his risk-averse clients for choosing any investment that fails, even over the short term. Consequently, the OPCs tend to invest most of their contributions in Costa Rican bonds.

Costa Rican bonds currently pay upwards of 13% interest. That’s how much the bonds have to pay to overcome inflation risk (inflation is currently low but expected to rise, given excessive government borrowing) and, for overseas lenders, the risk of currency depreciation.

Unlike our system, Costa Rica’s system has two formal distribution methods. Retirees can take a monthly income equal to one-twelfth of the earnings on their (notional) accumulated savings, leaving the principal untouched as a bequest. This is called the “permanent income” method. Alternately, they can take a “scheduled withdrawal.” Each retiree’s notional accumulation is divided by their years of life expectancy, and they receive that amount each year for as long as the money lasts.

There are two other withdrawal options. If the payout from the two formal methods is equal to or less than 10% of the payout from a retiree’s defined benefit pension, then the accumulation can be taken as a lump sum. Given the short history of the ROP, this method has been common. If accumulations are large enough—$50,000 or more—they can be applied to a life annuity from the National Insurance Institute, or INS, a state-sponsored monopoly since 1948.

Rising debt

Maggi and other officials and academics here hope that Costa Ricans will contribute enough to the ROP to raise their income replacement rate by about 20 percentage points and turn their income from the national DB plan (which currently replaces 40% to 60% of income but which is ailing, due to a fast-rising dependency ratio).

The big problem is that, individually and as a nation, Costa Rica is sinking farther into debt. The national debt grew by 14% last year, thanks in part to the cost of paying for unfunded $20,000-a-month pensions for certain judges and officials. Personal credit card debt grew by 20%, as Costa Ricans struggle to afford luxuries like cellphones and automobiles. Even as they earn up to 13% on pension savings from government bonds, Costa Ricans can pay more than 50% annual interest on credit cards issued by government-owned banks.

The automobile, a symbol of prosperity as well as a practical necessity, weighs heavy on Costa Rica. Most Costa Ricans can’t easily afford new cars without long-term credit, but they are buying them anyway. In only a few years, automobile ownership has jumped to 37% of households from 14%. The government discourages the purchases of new automobiles by levying a 52.3% sales tax; a Toyota Corolla that cost $25,000 in the U.S. costs $37,500 here. Taxes on older cars are higher. The government doesn’t want to encourage the import of clunkers.

Many of the main highways are still two lanes, which creates long lines behind 18-wheelers on hills. By car, the 153-mile cross-country trip from Puntarenas to Limon takes four and a half hours. Buses are plentiful, but they seem to contribute more to congestion than relieve it. To go any significant distance, you have to change buses several times and buy a separate ticket for each ride. “It’s very inconvenient,” Maggi said.

In 2013, a committee of five engineers was created to study the feasibility of building a metro linking San Jose with exurbs of Guadalupe to the north and Desamparados to the south. Costa Ricans currently spend about an hour commuting to San Jose from those places; a metro would cover the distance in an estimated 10 minutes.

People use the existing light rail that teeters across the breadth of the city, stopping at the quaint old station in central San Jose, but the train, ironically, is the slowest method of urban transport here. The christening of a 14 km subway in neighboring Panama four years ago generated subway envy here. The instability of the local geology—Costa Rica is a Hawaii-like necklace of dormant volcanoes—may require surface rail or elevated rail rather than a subway. Given the country’s fiscal problems, the rail project may be several years away.

But who knows? Maybe the Chinese will build it, just as an American named Minor Keith built a now-vanished railroad to carry coffee from San Jose to Limon in the 1870s and ’80s. To feed his Jamaican workers, Keith planted bananas along his railroad’s right-of-way. When the banana trade flourished, Keith started the United Fruit Company—a firm widely known today as Chiquita.

Kill Bills: Republicans attack ‘safe harbor’ for state auto-IRAs plans

Posted on February 16, 2017 by Editorial Staff -

House Republicans passed two joint resolutions this week intended to eliminate an Obama Department of Labor ruling, finalized last August, that created a legal “safe harbor” that removed a major regulatory obstacle to the establishment by states and municipalities of auto-enrolled IRAs at private companies that don’t otherwise offer a workplace savings plan.

That obstacle was the possibility that the auto-IRAs would be subject to Department of Labor regulation and the Employee Retirement Income Security Act of 1974 (ERISA), the law that governs workplace pensions. The resolutions were applauded by two financial industry groups, the Investment Company Institute and the National Association of Insurance and Financial Advisors, and condemned by the National Conference on Public Employee Retirement Systems.

If passed, the new legislation could end the creation of those auto-IRAs. The National Association of Insurance and Financial Advisors, whose members sell 401(k) plans to small companies, would prefer to see public marketplaces where employers can buy plans through advisors. ICI represents the asset managers that supply mutual funds to 401(k) plans. NCPERS represents public sector pensions.

But the public plan initiatives began precisely because of market failure—the failure of small employers to offer small plans, even when they had the option to do so—that left millions of Americans with access to individual IRAs—which hardly anyone uses–but not salary deferral plans at work, which are very effective. Several years ago, the U.K. created NEST—the National Employee Savings Trust—to solve the same coverage shortage at small firms in that country.

The two resolutions, introduced February 8, H.J. Res. 66 and H.J. Res. 67, are sponsored by Rep. Tim Walberg (R-MI), chairman of the Subcommittee on Health, Employment, Labor, and Pensions of the House Committee on Education and the Workforce, and Rep. Francis Rooney (R-FL).

H.J. Res. 66 reads:

Disapproving the rule submitted by the Department of Labor relating to savings arrangements established by States for non-governmental employees.

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Department of Labor relating to “Savings Arrangements Established by States for Non-Governmental Employees” (published at 81 Fed. Reg. 59464 (August 30, 2016)), and such rule shall have no force or effect.”

H.J. Res. 67 (which undoes the amendment that allows cities like New York to create non-ERISA savings plans) reads:

Disapproving the rule submitted by the Department of Labor relating to savings arrangements established by qualified state political subdivisions for non-governmental employees.

Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, that Congress disapproves the rule submitted by the Department of Labor relating to ‘‘Savings Arrangements Established by Qualified State Political Subdivisions for Non-Governmental Employees” and such rule shall have no force or effect.

The state-sponsored programs are intended to remedy the fact that at any given time about half of American workers have no access to a tax-deferred savings program at work because their employers choose not to sponsor a plan.

Such programs, sometimes called auto-IRAs, are designed to help Americans save more for retirement, lest they run out of money in old age and put added pressure on public sources of assistance, such as Medicaid. The initiatives have made the most progress in states with traditionally Democratic legislatures, such as California, Illinois, Oregon and Connecticut.

But the state and local plans may be unworkable if they are subject to national pension law, known as ERISA. The August 2016 Obama DOL rule resolved that issue, saying that the plans needn’t be regulated by ERISA.

But the 401(k) industry has at times criticized such programs as government intrusion in a private market. Industry-friendly Republican lawmakers, with control over both branches of Congress and a Republican president, are now in a position to make it more difficult for states and cities to sponsor such plans.

NAIFA, the National Association of Insurance and Financial Advisors, whose members sell 401(k) plans to small companies and can earn large commissions by doing so, as well as build relationships with wealthy business owners who may later become retail clients, has opposed the public plans as an intrusion on its turf.
In a February 8letter to Speaker of the House Paul Ryan and House Minority Leader Nancy Pelosi, NAIFA president Paul Dougherty urged Congress to pass H.J.R 66 and 67. A statement on NAIFA’s website reads:

“NAIFA does not believe that a state-run plan that competes with private market plans is the answer. Availability and access to retirement savings options are not the problem— there already exists a strong, vibrant private sector retirement plan market that offers diverse, affordable options to individuals and employers. Nearly 80% of full-time workers have access to a retirement plan through their employer, and more than 80% of workers with workplace access to plans participate in a plan.

“NAIFA believes that states would be better served by using scarce state resources for education and outreach efforts designed to educate their citizens about the importance of saving for retirement, rather than implementing their own costly state-run plan. NAIFA supports the voluntary, private market-oriented legislation enacted in Washington State and New Jersey, as discussed below.”

In a press release this week, the National Conference on Public Employee Retirement Systems (NCPERS) said it will fight the effort in Congress to reverse various state and local efforts to create publicly-sponsored, auto-enrolled salary-deferral workplace savings plans and require employers who don’t otherwise offer retirement plans to help facilitate them.

The new legislation “would attempt to block federal regulations to facilitate the creation of public-private partnerships to expand workplace retirement savings options… The resolutions are designed to derail innovative programs being implemented in seven states and evaluated in at least 25 more,” according to an NCPERS release.

In 2016, the Obama Department of Labor issued regulations to facilitate the creation of these public-private plans after confirming that the Secure Choice programs are permissible under the provisions of the Employee Retirement Income Security Act, or ERISA. The resolutions seek to revoke these so-called safe-harbor provisions for state and local programs, respectively.

California, Connecticut, Illinois, Maryland, Massachusetts, New Jersey, Oregon, and Washington have already enacted legislation to help private-sector employers automatically enroll their employees in workplace retirement savings programs.

“The alternative facts advanced by the sponsors of these resolutions ignore reality,” said Hank H. Kim, NCPERS executive director and counsel, echoing a phrase—alternative facts—introduced into public discourse by Trump aide Kellyanne Conway recently to describe facts as well as non-facts that are chosen for specific effects.

“These state-led retirement savings programs would be responsibly managed for the benefit of savers and only savers, would meet the needs of employers, and would ultimately save taxpayers billions of dollars,” he added.

States and municipalities have spent several years developing savings programs for the estimated 55 million Americans—half of the private-sector workforce—whose employers offer no retirement benefits. Their goal is to shrink the retirement savings “deficit,” which is the difference with what people need to save for retirement and what they are actually savings.

The Employee Benefit Research Institute has estimated this deficit among workers 25-to-64 years of age at $4 trillion. The EBRI has not demonstrated, however, whether a deficit of this magnitude is a new phenomenon, or whether Americans have always collectively under-saved for retirement by large amounts, or whether it represents an improvement over past savings habits, or what the economic effects might be if Americans tried to increase their savings by $4 trillion.

Where HR meets social media, Blackstone will be there

Posted on February 16, 2017 by Editorial Staff -

Blackstone’s private equity funds have agreed to buy Aon Hewitt’s technology-enabled benefits and human resources platform from Aon plc for $4.8 billion, including $4.3 billion at closing and up to $500 million more based on future performance.

The newly formed stand-alone company will be the largest benefits administration platform in the United States, serving about 15% of the U.S. working population in more than 1,400 companies, and will be a leading services provider for cloud-based HR management systems, according to a Blackstone release.

Aon’s Chris Michalak will be CEO of the new, standalone business, leading a workforce of about 22,000 people.

With the purchase, Blackstone jumps squarely into what’s been described over the past few years as the next generation of human resource technology. Moving HR data from on-site systems and spreadsheets into the cloud makes it easier for large companies to move ahead with initiatives linked to core businesses.

Those initiatives include globalizing their workforces, moving time-consuming benefits chores into the hands of employees, increasing cyber-security, and harvesting data about current employees and potential employees from social media. Already, according to Deloitte, about 40% of large companies are already “leveraging social data” to “support efforts around recruitment and engagement.”

A report published by Deloitte University Press two years ago said:

“Today’s forward-thinking HR organizations are well aware of the treasure trove of data available through outside sources—such as social networks—that can help monitor and build employment brand, identify and recruit talent, better understand compensation strategies, recognize flight risk, and monitor employee satisfaction and engagement. As one executive commented to us as we conducted this research, ‘Why do social media sites like LinkedIn appear to know more about my employees than we do, and how can we leverage these data and insights?’”

Citigroup, Credit Suisse, and SMB Capital are acting as financial advisors to Blackstone with respect to the transaction, and Kirkland & Ellis LLP is acting as Blackstone’s legal counsel. Morgan Stanley is acting as financial advisor to Aon with respect to the transaction, and Sidley Austin LLP is acting as Aon’s legal counsel. Debt financing related to the transaction is being provided by BofA Merrill Lynch, Barclays, Credit Suisse, Citigroup, Macquarie, Deutsche Bank, and Morgan Stanley.

The transaction is expected to close by the end of the second quarter of 2017.

Lincoln Financial adds fee-based options to VAs and FIAs

Posted on February 16, 2017 by Editorial Staff -

To make its variable and fixed indexed annuities to fee-based advisors—some of whom may have shifted away from selling products on commission because of the Obama Department of Labor’s fiduciary rule—Lincoln Financial Group has introduced new fee-based versions of its variable and fixed indexed annuities

“These products provide savers with a known source of income through a competitive cost option with a broad selection of investment choices, and no surrender charges,” Lincoln said in a release this week.

The fee-based variable annuities offer the same guaranteed lifetime income riders that are available through Lincoln’s core commission-based solutions: Lincoln ChoicePlus Assurance, American Legacy and Lincoln Investor Advantage.

In addition to creating a fee-based version of the Lincoln Core Capital indexed annuity, Lincoln has added fee-based versions of its Covered Choice 5 and Covered Choice 7 indexed annuities.

“Until now, there have been limited choices for fee-based guaranteed income products,” said John Kennedy, senior vice president and head of Retirement Solutions Distribution for Lincoln Financial Distributors, in a release.

Great American and Allianz Life have launched fee-based indexed annuities. Lincoln claims to be the first to develop and launch a fee-based fixed indexed annuity for registered investment advisors, who have never been a fertile market for annuities, in part because their high net worth clients can often afford to self-insure against longevity risk.

Voya launches ‘Journey’ indexed annuity

Posted on February 16, 2017 by Editorial Staff -

Voya Financial, Inc., announced this week that it has added the new Voya Journey Index Annuity to its fixed indexed annuity lineup. Journey offers a two-stage interest crediting approach. This product is intended for commission-based sales, but Voya said it will introduce a fee-based version later this year.

According to this two-stage approach, when returns are pegged to either the J.P. Morgan Meridian Index and the Citi Dynamic Asset Selector 5 Excess Return Index:

In contract years 1-6, the accumulation value of the contract can receive a Performance Interest Credit for every year when the participating index—the J.P. Morgan or the Citi index—is above the initial level.
In contract year 7, the uncapped point-to-point return of the participating index (or combination of indices) is credited to the accumulation value.

“It’s a new design in the marketplace,” Chad Tope, Voya’s president of annuities and individual life distribution, said in an RIJ article published last December 15. “It’s an FIA product with a seven-year term. It will compete with, or act like, an indexed certificate of deposit, but tax-deferred. We’ve had term point-to-point products, with seven- and nine-year terms, but there was no value during the term. With this design, we’re offering credits.”

Asked what might motivate fee-based advisors to sell indexed annuities when they do not have the extra incentive that commissions traditionally provide, Tope said, “When it comes to fee-based FIAs, advisors are still deciding on how to treat these type of products. They are asking a lot of questions—just like many of the firms.”

Wealth, like cream, keeps rising to the top

Posted on February 16, 2017 by Editorial Staff -

The number of millionaire households in the United States has grown by more than 800,000 over the past five years and by more than 1.3 million since 2006, before the financial crisis, according to the annual Wealth & Affluent Monitor published today by Phoenix Marketing International.

The overall wealth market is growing, yet the ratio of millionaires to total U.S. households has remained relatively flat and wealth is more concentrated and shifting geographically.

The 2016 Phoenix Wealth & Affluent Monitor shows that as of mid-2016:

Nearly 6.8 million U.S. households, approximately 5.5% of all U.S. households, had $1 million or more in investable assets. This represents a 4% one-year increase in the number of millionaire households, or nearly one-quarter of a million more households than in 2015.
Over the past five-year and 10-year periods, the ratio of millionaire households to total U.S. households has remained relatively flat, up from 4.8% in 2006 and 5.1% in 2011.
Households with at least $1 million in investable assets hold approximately $20 trillion in total liquid wealth, or approximately 59% of total liquid wealth in the U.S.
Within the wealth segment, the greatest asset growth was among households with between $1 million and $10 million in investable assets. Their investable assets grew by $809 billion, to a total of $17.8 trillion.
By comparison, there are 16.4 million households in the broad affluent market (with between $250,000 and $1 million in investable assets). They control $8.5 trillion in investable assets, or 35% of total liquid wealth in the U.S.; however, they lost $56 billion collectively between 2015 and 2016. The vast majority of these losses ($54 billion) were among the lower mass affluent segment (households with $250,000 to $500,000).
The 14 million near-affluent households in the U.S. (with between $100,000 and $250,000), saw investable assets decline by $79 billion between 2015 and 2016, to $2.6 trillion.
The concentration of wealth in the U.S. continues to deepen as the top 1% of wealthiest U.S. households now holds 24 percent of liquid wealth. Non-affluent households, representing 70% of U.S. households, control less than 10 percent of the nation’s liquid wealth.

State ranking of millionaires

In 2016, there were few changes among the top 10 states ranked by the ratio of millionaire households to total households. The top 10 states are:

Maryland (7.55%) – unchanged since 2011
Connecticut (7.4%) – unchanged in 2016
New Jersey (7.39%) – moved up one place in 2016
Hawaii (7.35%) – declined one place in 2016
Alaska (7.15%) – unchanged from 2015
Massachusetts (6.98%) – unchanged from 2015
New Hampshire (6.82%) – unchanged from 2015
Virginia (6.64%) – unchanged from 2015
District of Columbia (6.32%) – up one place from 2015
Delaware (6.28%) – down one place in 2016

An analysis by Phoenix reveals more significant shifts and regional impact of the financial crisis, recession and slow recovery of jobs and wages over the past 10 years. For example:

Michigan ranked #18 in 2006, but by 2011 had dropped to #26 and, despite recent growth, ranked #29 in 2016.
Florida ranked #10 in 2006, but by 2011 had dropped to #19 and ranked #32 in 2016.
New York ranked #13 in 2006 but rose to #12 by 2011 before dropping to #18 in 2016 as the disparity in wealth, particularly between upstate and downstate, became more prevalent.
The District of Columbia, which ranked #9 in 2006, dropped to #20 at the outset of the financial crisis but has bounced back to its pre-recession ranking at #9 in 2016.
Other states, including North Dakota, South Dakota and Texas, have risen notably since before the financial crisis.

Approximately 70% of the wealth and affluent market is comprised of Americans age 52 or older who have at least $100,000 in investable assets. Baby Boomers account for more than half (55%) of the market while the Silent Generation represents 15 percent. Approximately 13% of the wealth and affluent market now is composed of the Millennial generation, who are age 36 or younger. They are gaining on the members of Generation X, which make up the remaining 17% of the market, and who are faced with financial challenges of aging parents and education costs for their children.

The Wealth & Affluent Monitor (W&AM) sizing estimates in the U.S. are developed using a combination of sources including the Survey of Consumer Finance (SCF) as well as Nielsen-Claritas. Investable assets include education/custodial accounts, individually-owned retirement accounts, stocks, options, bonds, mutual funds, managed accounts, hedge funds, structured products, ETFs, cash accounts, annuities, and cash value life insurance policies.

Is (or Isn’t) Time Running Out for the Fiduciary Rule?

Posted on February 9, 2017 by Kerry Pechter -

Time may not be running out on the Department of Labor’s fiduciary rule as quickly as first assumed when the Trump administration issued its February 3 memorandum calling for a review of the rule, which requires that advisors on retirement accounts put their clients’ interests ahead of profits.

A Dallas federal judge yesterday dismissed industry objections to the DOL rule in an 81-page ruling, after ignoring administration requests to postpone the issuance of her decision. Lawyers also pointed out to RIJ this week that the DOL rule has been legally binding since last June, and therefore may not be easily cast aside.

There’s still the question of whether the rule’s April 10, 2017 “applicability” date will be pushed back. Several ERISA lawyers believe it will be. President Trump’s final memorandum on the rule did not specify a delay; it merely said that the DOL would take action to rescind or revise the rule if it “created burdensome legal costs for financial services providers” that might, in turn, be passed along to investors.

The administration seems determined to delay the applicability date while it decides how to confront the rule, however. On February 3, acting DOL secretary Edward Hugler said in a press release, “The DOL will now consider its legal options to delay the applicability of the date as we comply with the President’s memorandum.” The nominee for Secretary of Labor, Andrew Puzder, hasn’t yet been confirmed.

Could the delay be delayed?

But would the administration need to hold a comment period before it could call a time-out on the applicability date? Yes, said Micah Hauptman, financial services counsel at the Consumer Federation of America, in a recent interview with Bloomberg BNA.

A formal rulemaking process would be the “most conservative” way of delaying the rule through regulation, Hauptman said. “That requires saying, ‘We disagree with the findings and the overall rulemaking of the previous administration, and here’s why,’” Hauptman said. “They would have to do it through reasoned decision-making and analysis based on all the relevant facts.”

Hauptman, whose group supports the fiduciary rule, said that a formal rulemaking process would be necessary because the rule is already in effect, even if it doesn’t apply until April 10 of this year. The way the law was written, he said, it became effective shortly after it was promulgated in the spring of 2016. The fact that the industry had an extra year to comply would not change that, apparently.

Even “if they’re changing the applicability date, we still think it would require notice and comment, because the rule is already effective,” Hauptman said. “The rule survived a congressional review act challenge and went into effect last June. That’s a widely recognized fact, not my opinion.”

Hauptman pointed to an announcement in the Federal Register on April 8, 2016, that the rule became effective on June 7, 2016, and that the applicability date was set for April 10, 2017 as a way to give financial services firms more time to adapt their processes and procedures to comply with the rule, such as creating new training programs and retooling technology for new kinds of reporting.

“The DOL rule has long been effective—no real dispute there,” said Mercer Bullard, a University of Mississippi law professor who gave Congressional testimony in favor of the rule last year. “It’s also hard to imagine a legal avenue by which the implementation date could be moved because that is an amendment to the rule. I certainly hope that the DOL will be sued if it violates the Administrative Procedure Act, but that’s a function who can afford to bring the case.”

“The fact that the rule is effective is very meaningful. This gives the proponents of the survival of the rule a lot of ammunition. This rule went into effect on June 7, 2016. Under the Congressional Review Act, Congress tried to overturn it and couldn’t. But the DOL delayed applicability,” ERISA attorney Marcia Wagner told RIJ yesterday.

“This matters because the DOL under the Administrative Procedure Act can’t change the rule without engaging in the regulatory process,” she added. “That can take a year. You have to write the new regulations and get public comment. The public comment has to come back. It’s really a long process. I don’t know how you do that before April 10. That may be why the proposed draft of the [Trump] memorandum had a 180-day delay written into it, but the final draft did not.”

A ‘slam dunk’ to justify rescission?

Others assume that a delay will be announced very soon. The law firm of Drinker Biddle published an alert this week saying, “We expect an announcement, possibly within a matter of days, that steps are being taken to delay the April 10 applicability date… Assuming that the applicability date is delayed, and that the delay survives potential legal challenges, the consequences will be as follows:

The applicability date will likely be delayed, either immediately or through multiple subsequent steps, for six months or even a year. As a result, service providers to retirement plans and IRAs will likely not need to comply with the Fiduciary Rules on April 10.
Instead, those service providers will be required to comply with the currently applicable fiduciary regulation and existing prohibited transaction exemptions (the “old” rules).

In a comment circulated to his clients, advisor Philip Chao wrote this week, “We suspect the DOL will soon trigger a delay to the application date of the new law by six months or longer depending on the amount of time the DOL expects to complete the study. In the meantime, the Fiduciary Rule will not become applicable.

“We expect the main portion of the rule to remain intact and the more controversial and administratively cumbersome portion to be revised. Lobbyists will again work overtime to defeat or reshape the Fiduciary Rule.”

Once that process begins, according to ERISA attorney Jason C. Roberts of the Pension Resource Institute, it will be a “slam dunk” to show that the rule is inconsistent with Trump administration policies because it fails one of the three tests described in Trump’s February 3 memorandum.

That test asks “whether the Fiduciary Duty Rule is likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.” Roberts believes that it clearly does.

“The path of least resistance may be for the [Trump] DOL to focus on [that issue], he wrote in an essay on LinkedIn, adding that “the bigger question is then what to expect in terms of either a ‘proposed rule rescinding or revising’ the current regulation and the degree to which either would be determined to be ‘appropriate and as consistent with law.’

But Bullard told RIJ in an email this week that most of the costs of complying with the rule have already been incurred by financial services firms. In other words, at least part of the horse is out of the barn.

“Changes in the industry over the last year have radically changed the economics of compliance,” he wrote, referring to the various internal costs of complying with the rule. “Many have already incurred the cost.” [Other changes have] “proved false the industry’s claims that brokers would not be able to charge commissions. Many have decided to do exactly that under the rule.”

The Administrative Procedures Act

Bullard also suggested that consumer advocacy groups with adequately deep pockets might sue the DOL to prevent the discarding of the rule. “I expect that DOL will be sued if it amends the rule—which would include delaying it—without doing a cost-benefit analysis, and such an analysis would be impossible to complete prior to the implementation date.”

Who might sue the DOL? “Any investor advocacy group with the funds to hire counsel, such as Better Markets, unions, or Public Citizen. The grounds would be arbitrary and capricious rulemaking, failure to provide for notice and comment,” Bullard added.

At one consumer advocacy group, a lawsuit is currently being discussed. “We are considering all our options, including challenging the Administration in court if it violates procedural requirements,” said Barbara Roper, Director of Investor Protection at the Consumer Federation of America.

The grounds for such a suit, Hauptman said and ERISA attorney Marcia Wagner said this week, would be a violation by the Trump administration of the Administrative Procedures Act. “We will be watching whether the Administration violates the Administrative Procedure Act or otherwise violates the law. There are a number of ways this could happen,” Hauptman told RIJ.

An unstoppable trend

Even without the rule, many believe that the trend toward fee-based advice and toward the web-mediated offering of low-cost, transparent, participant-like services to the mass of rollover IRA clients will continue. Some even think that the DOL rule was merely just a formal endorsement of stronger, technology-driven trends in financial services.

Wagner, in a bulletin this week, conceded that “it is highly unlikely that the DOL Fiduciary Rule and related exemptions such as the Best Interest Contract Exemption (BICE) will survive in their current form, in light of President Trump’s clear willingness to dismiss government officials unwilling to conform to his agenda.

But she encouraged her industry clients to assume that the rule will stand, because it’s better for them in the long run.

“Even if the DOL concludes that the best course of action is to return to the rules in effect prior to the enactment of the DOL Fiduciary Rule and BICE, it would not necessarily be the best course of action to undo all of the compliance steps that have already been taken,” she wrote.

“Some of the actions that have been accelerated by the DOL Fiduciary Rule reflect an industry trend towards an advisory rather than a brokerage based platform. Moreover, the move towards more transparent fee disclosures may reflect new industry standards for ‘best practices.’ Focusing more narrowly upon compliance issues, transition-period documentation should be retained, although its final form may need to be modified to reflect any future DOL action.

“Finally, it is important to keep in mind that the primary enforcer of violations of the DOL Fiduciary Rule and BICE was to be the private tort bar, rather than the DOL or IRS. Even if BICE is repealed, the tort bar will seek and exploit various causes of action. For example, compensation grids that have the effect, even if unintended, of incentivizing investments in particular funds may be challenged.”

Striking a lighter note, Bill Harris, the CEO of robo-advisor Personal Capital, responded to a comment by White House National Economic Council director Gary Cohn that the fiduciary rule is “a bad rule for consumers… [It’s] like putting only healthy food on the menu because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.”

To which Harris, who favors the retention of the DOL rule, replied in a press release, “Encouraging people to die younger is one way to solve our retirement crisis. But we think a better way is to encourage people to save responsibly and invest well, so they’re able to live a long life in financial security.”

Allianz Life issues no-commission fixed indexed annuity with income riders

Posted on February 9, 2017 by Editorial Staff -

Allianz Life has offered its first fee-based fixed indexed annuity (FIA), calling it the Retirement Foundation ADV annuity, Allianz Life Insurance Company of North America announced this week.

The new product is part of a slowly developing post-DOL-fiduciary-rule trend toward indexed and variable annuity products that can be sold by advisors who charge an annual fee based on assets under management rather than receiving a commission from the annuity issuer.

So far, no authority appears to have questioned whether advisors should charge a full management fee on the assets in a packaged product such as an annuity. Defenders of commission-based annuity sales have long argued that annual management fees can potentially cost a client more than an upfront commission would have.

Retirement Foundation ADV offers two guaranteed lifetime withdrawal options. The first offers a fixed percentage payout that depends on the age at which income begins. Its age bands start at 4% per year at ages 45-49 for single contracts (3.5% for joint contracts) and rise 10 basis points with each year of delay, until reaching 7.9% (7.4% for joint contracts) if income begins at age 80.

Alternately, clients can take a payout that starts at 3% (2.5% for joint contracts) but increases each year. The annual payout increases are 25 basis points for those who start income at age 50 and rises by one basis point per year of delay until reaching 55 basis points at age 80. The income rider automatically applies at issue and costs 1.05% of the accumulation value (account value) each year. The rider charge continues even after income payments begin.

The account value (and income received) goes up each year by the interest credited, if any, under the annual point-to-point index crediting method. Policyholders can choose any combination of the four available indices: the S&P 500, Nasdaq-100, Russell 2000, or Barclays US Dynamic Index II. There’s a cap on annual interest gains that is re-determined at the start of every contract year.

Before income begins, there’s also a potential market value adjustment on withdrawals in excess of the 10% allowed by law. The adjustment either increases or decreases the withdrawals, depending on whether corporate bond yields have gone down or up.

Federal Judge Upholds Obama Fiduciary Rule

Posted on February 9, 2017 by Kerry Pechter -

Despite the Trump administration’s request for her to delay its publication, a federal judge in Dallas yesterday released an 81-page ruling that upheld the legal basis of the Obama “fiduciary rule” in the face of challenges from life insurance and annuity industry groups.

In Chamber of Commerce of the U.S.A. et al v. Edward Hugler, Acting Labor Secretary, and the Department of Labor, Judge Barbara M. G. Lynn affirmed that the Obama DOL acted within its authority when it required financial advisors to put the interests of retirement investors ahead of their own and allowed investors to sue advisors who violate that requirement.

Among other things, the Obama fiduciary rule makes it difficult for broker-dealer reps and insurance agents to accept commissions from insurance companies when selling annuities to rollover IRA clients and 401(k) plans—thus interfering with a long-standing and lucrative business model. The rule went into effect in June 2016 but the industry was given until April 2017 to fully comply with it.

On Tuesday, the Trump DOL, in an extraordinary direct appeal by the executive branch to the judicial branch, asked Lynn for a delay. In an equally extraordinary show of defiance of the executive branch, Lynn apparently ignored the request and released her ruling.

President Bill Clinton appointed Lynn, 64, to the federal bench in 1999. In 2016, she became the first woman to hold the position of chief judge of the Northern District of Texas, Dallas Division.

The suit filed by the Chamber, the Annuity Leadership Council, and the American Council of Life Insurers, claimed that, “financial professionals are improperly being treated as fiduciaries and should not be required to comply with heightened fiduciary standards for one-time transactions.”

They also claimed that “the conditions to qualify for an exemption under BICE [the Best Interest Contract Exemption, which, if met, allowed commission-paying sales of indexed and variable annuities] are so burdensome that financial professionals will be unable to advise the IRA market and sell most annuities to ERISA plans and IRAs.”

Specifically, the plaintiffs’ suit said that:

The Fiduciary Rule exceeds the DOL’s statutory authority under ERISA.
The BICE exceeds the DOL’s exemptive authority, because it requires fiduciaries who advise Title II plans, such as IRAs, to be bound by duties of loyalty and prudence, although that is not expressly provided for in the statute.
The written contract requirements in BICE and PTE 84-24 impermissibly create a private right of action.
The rulemaking process violates the Administrative Procedure Act (“APA”) for several reasons, including that the notice and comment period was inadequate, the DOL was arbitrary and capricious when it moved exemptive relief provisions for FIAs from PTE 84-24 to BICE, the DOL failed to account for existing annuity regulations, BICE is unworkable, and the DOL’s cost-benefit analysis was arbitrary and capricious.
The BICE does not meet statutory requirements for granting exemptions from the prohibited transaction rules.
The new rules violate the First Amendment, as applied to the truthful commercial speech of their members.
The contractual provisions required by BICE violate the Federal Arbitration Act.

In her ruling, Judge Lynn rejected all of these claims and refuted the arguments behind them. The Trump administration is expected to try to repeal or rescind the rule—especially the part that allows clients to sue brokers in court rather than having complaints heard in industry-dominated arbitration hearings.

The fiduciary rule has plugged what the Obama administration saw as a much-abused loophole in pension and securities laws. For many years, commission-paid brokers and agents could sell annuities and mutual funds that weren’t necessarily in the client’s best interest. They could justify such sales by claiming that they weren’t acting as ongoing, trusted advisors to their customers but merely as salespeople in a classic buyer-beware situation.

The Obama DOL acted in part because the stakes were becoming higher. At the time the rule was issued, some $7 trillion had migrated from the institutional realm of 401(k) plans into the retail world of individual IRAs through the mechanism of so-called “direct rollovers,” where it was easier for brokers and agents to take advantage of the loophole.

One legal complication: Rollover IRAs fell into a grey zone between the institutional and retail worlds. The DOL saw them as under its jurisdiction, while the financial industry saw rollover IRAs as part of its turf.

Fees were also typically higher in the retail rollover world and regulations less strict. That made rollover assets a potential boon to the retail financial services industry but a source of concern for the DOL. It saw high fees eating up a significant portion of American’s tax-deferred savings and potentially consuming much of the benefits to savers of the right to defer income taxes on the money in their 401(k) and traditional IRA accounts until age 70½.

Who buys income annuities, and why most people don’t: EBRI

Posted on February 9, 2017 by Editorial Staff -

In a U-shaped market pattern, immediate annuities are usually purchased by those with either the most or least personal savings, according to a new study by the Employee Benefit Research Institute.

“Those with inadequate assets might value a regular stream of income very highly and those with the most [assets] might expect to live longer and can also afford it even after leaving a bequest,” EBRI said in a release this week.

Overall demand for retail immediate annuities may be low because they are crowded out by Social Security and defined benefit pensions, EBRI suggested.

“A large majority—more than 70%—of households that are currently receiving Social Security benefit already get at least three-quarters of their income in the form of annuities, from Social Security, employer-provided pensions, and other annuity contracts,” said Sudipto Banerjee, EBRI research associate and author of the study. “The fact that most retirees are already highly annuitized might help explain the lack of demand for additional annuity income.”

While the decline of defined benefit (DB) pension plan coverage has stimulated interest in other options for generating retirement income, demand for annuities has remained low in the United States. EBRI conducted its analysis to understand the public’s preferences for such products, with a focus on how savings levels affect preferences for immediate annuities (which begin paying out a regular stream of income as soon as they are purchased).

EBRI used an experiment from the Health and Retirement Study (HRS) to assess the effect of savings on the preference for immediate annuities among retirees (ages 65 and above).

Regression results show that effect of savings on annuity preferences follow a U-shaped pattern, meaning that people at the bottom- and top-ends of the savings distribution (those with the least and most assets) have a stronger preference for such annuities than people in the middle of the savings distribution.

But savings has a large positive effect on preference for annuities only for those in the highest-savings quintile (the top 20% in the wealth distribution).

The study notes that possible explanations for such behavior could be:

People at the bottom of the savings distribution are very likely to run out of money in retirement and thus have a stronger preference for annuities.
People at the top end of the savings distribution expect longer lifespans and can afford annuities even after leaving a financial legacy for their heirs.
People in the middle generally face more uncertainty about their retirement adequacy and so they are more likely to hold on to their savings for precautionary purposes and perhaps also for some hope of leaving a financial legacy for their heirs.

The EBRI results also show annuity purchasers usually opt to annuitize less than half of their savings. Only 16.5% of retirees (ages 65 and above) preferred full annuitization; 43% preferred a one-quarter annuitization.

The full report, “How Does Level of Savings Affect Preference for Immediate Annuities?” is published in the Feb. 8, 2017 EBRI Issue Brief, online at www.ebri.org.

Average 401(k) balances up 33% since 4Q2011: Fidelity

Posted on February 9, 2017 by Editorial Staff -

Fidelity Investments this week released its 401(k) and Individual Retirement Account (IRA) analysis for the fourth quarter of 2016, which revealed:

A record average 401(k) balance. Increasing contributions and stock market performance drove the average 401(k) balance to an all-time high of $92,500 at the end of Q4, topping the previous high of $92,100 in Q1 2015 and an increase of $4,300 from a year ago. The average five years ago was $69,400 for IRAs and 401(k) accounts.

Number of IRA accounts top 8.5 million. Nearly one-half million IRA accounts were added in 2016 on Fidelity’s platform, which ended the year with more than 8.5 million accounts. The average IRA balance of $93,700 is up $3,600 year-over-year.

Contribution rates rebound to pre-financial crisis levels. The average contribution rate to Fidelity 401(k)s reached 8.4% in Q4, the highest level since Q2 2008. Over the past 12 months, the total savings amount (employee contributions plus employer match/profit sharing) reached a record $10,200.

Percentage of 401(k) loans drops to lowest level in seven years. As contribution rates increase, the portion of Fidelity account holders with an outstanding 401(k) loan dropped to 21 percent, the lowest level since Q4 2009. For loan-takers, it’s important to continue 401(k) contributions during the life of the loan and consider increasing contributions once the loan is paid off.

“More than one-in-four Fidelity 401(k) savers increased their savings rate in 2016—an all-time high—and the number of people with a 401(k) loan dropped to its lowest point in seven years,” said Kevin Barry, president, Workplace Investing at Fidelity Investments.

More retirement savers are attending online seminars on how to set goals for retirement and increase their savings, and learn the importance of asset allocation, Social Security strategies and more, Fidelity said.

In the first half of 2016, attendance at Fidelity’s live web sessions was up 52% and use of on-demand seminars, such as a session on how to prioritize savings goals, was up 62%. Fidelity’s interactive Money Check-up, which helps individuals understand their financial wellness and where they need to act, has been completed by over 300,000 people since last June. Fidelity’s retail planning tools saw a 41% increase in traffic in 2016, with more than half of visitors creating, modifying or monitoring their retirement goals.

Fidelity Investments has assets under administration of $5.7 trillion, including managed assets of $2.1 trillion as of December 31, 2016.

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