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When You’re 64

Posted on January 4, 2017 by Kerry Pechter -

Paul McCartney wrote the music for “When I’m 64” in the late 1950s, several years before Medicare was invented. The Liverpool lad couldn’t have foreseen the wave of junk-mailings and robo-calls that health insurers would eventually be sending older Americans as they approach age 65 and try to choose a Medicare supplement provider.

But the song’s lyrics, added later, were prescient nonetheless. “Give me your answer, fill in a form,” indeed.

Sixty-four year-old Americans aren’t obligated to buy “supplemental” medical and drug insurance, but they’d be pound-foolish not to. The limitations of Medicare Part A (hospital insurance) and Part B (for doctors’ bills) coverage can expose patients to liability for potentially substantial deductibles and coinsurance.

Signing up for Medicare online is fairly easy. Signing up for a Medicare supplement is harder. Americans usually don’t get much help in choosing a Medicare Advantage or “Medigap” provider. If you specialize in retirement counseling—maybe you’ve earned the RMA or the RICP designation—you’ll be in a position to help them.

Budgeting for health care costs is an essential part of retirement income planning. With widely publicized estimates of out-of-pocket costs for couples’ health care in retirement in the mid-six figures (see sidebar, ‘Yours Sincerely, Wasting Away,’ in today’s edition of RIJ) and with Medicare spending in the crosshairs of Congressional deficit hawks, health insurance advice is becoming an essential part of retirement income advice.

‘Indicate precisely what you mean to say’

A lot of questions face Americans who are about to turn 65, including:

How do I sign up for Medicare?
How much does it cost and how do I pay for it?
For supplemental insurance, should I buy a Medicare Advantage plan or a Medigap plan?
How can I evaluate and compare these plans?
How much do they cost and how do I pay for them?
Can I be denied coverage?
How much should I budget for health insurance or health care in retirement?

Let’s address the items on this punch list one by one (The first few are easy):

How do I sign up for Medicare? Medicare eligibility begins a year or two before full Social Security retirement age (FRA); let’s assume that your clients want to enroll in the program before claiming Social Security benefits. They can do so online if they are at least age 64 and nine months, have no current Medicare coverage, and aren’t currently receiving an OASI benefits (Social Security, disability or survivors benefits). Exceptions to this process may apply—some people still have employer-provided coverage, others need financial assistance from Medicaid—but let’s assume the base case.

How much does Medicare cost and how do I pay for it? Medicare Part A is free (paid for in advance through payroll taxes). The standard Part B premium is $134 per month but most people who have earned their benefits while working will pay $109 in 2017. Individuals earning more than $85,000 (spouses with combined earnings of more than $170,000) will pay anywhere from $187.50 to $428.60 per month. Since our hypothetical clients aren’t yet receiving monthly Social Security checks (and having the premium deducted from it), Medicare will bill them directly. They can pay by check or electronic bank transfer.

For supplemental insurance, should I buy a Medicare Advantage plan? The path of least resistance will usually lead your client to a Medicare Advantage plan. These are HMO or PPO plans (“managed care”) that involve a commitment to a certain network of providers, usually concentrated geographically. Because Advantage plans tend to be local and advertise locally, your clients may already know who they are. Their brands may be familiar; they may have been the provider of your client’s employer’s health plan. An Advantage plan, in fact, resembles an employer plan: policyholders interact with the insurer, not Medicare, and the plans typically include prescription drug coverage. Many also offer optional vision, dental and hearing coverage. Aside from their network limitations, a limitation of Advantage plans is uncertainty: they may eliminate providers or drugs from coverage in order to manage their costs from year to year.

Or should I buy a Medigap plan? If so, which type? In contrast to Advantage plans, Medigap plans are traditional fee-for-service insurance contracts. Confusingly, they come in up to a dozen flavors: A, B, C, D, F, F–high deductible, G, H, K, L, M, and N. Of these, the “F” plans are the most comprehensive. There are dozens of Medigap providers, including giants like Aetna, Transamerica and USAA and many relatively small, niche insurers whose names you may never have heard before. The benefits are standardized by the government: i.e., every “F” plan will offer the same benefits. To find out which ones are available in your area, you can search here. Medigap plans are more flexible than Advantage plans; they don’t restrict access to network providers. Policyholders who get sick while traveling don’t have to worry much about violating network restrictions. On the downside, Medigap plans usually don’t include prescription drug coverage.

How much do supplemental plans cost? With Advantage plans, your clients pay as little as zero per month in premiums—an offer that many people find difficult to refuse. But they could face up to $6,700 a year in deductibles and co-pays, assuming they don’t go out of network. With Medigap plans, your clients might pay $150 per month for the most comprehensive type of plan (Plan “F”) from a highly rated company. Less comprehensive “A” or “B” plans cost as little as $45 a month, but may not cover the deductibles or co-pays that can be incurred under Medicare Parts A or B coverage.

How can I learn about, evaluate and compare these plans? You can find out which plans are offered in your area by using one of the zip code locators at Medicare.gov. For information on specific companies, Weiss Ratings publishes a pdf report on Medigap plans that we purchased online for $79 a few months ago. Weiss rates companies for “safety” on a scale of A+ through D and “Unrated.” The prices for each type of plan from each company are also listed, and they varied widely.

A senior financial analyst at Weiss Ratings, Gavin Magor, told RIJ this week that financial safe Medigap providers tend to offer better service. They’re usually quick to pay doctors, which makes doctors more confident about ordering services and billing for them. “It’s not necessarily about denial of claims. A financially stressed insurer might be less likely to pay a claim immediately. If a doctor has a poor experience with receiving payments, he or she might be less inclined to order something to be done for a patient,” Magor said.

Among “F” plans rated B or higher, annual premiums for “F” plans ranged from a low of $1,558 for a B+ plan from Aetna Health & Life to $3,887 for a B+ plan. The only A+ plan on the list comes from Physicians Mutual Insurance, a direct provider. The annual premium for its “F” plan was $1,817 per year.

Descriptions of Medicare Advantage plans that are offered within a particular zip code can also be found on Medicare.gov. There’s information about co-pays, typical annual out-of-pocket costs, and “star ratings” that describe each plan’s “overall quality and performance.” Some plans charge a monthly premium for medical care or drug coverage or both. When there’s a premium, the limit on annual out-of-pocket spending tends to be lower. A zero-premium plan might cap out-of-pocket spending at $10,000 per year. A plan with a $49.50 monthly premium might have a cap of only $4,800.

What’s better, Medicare Advantage or Medigap? This choice presents the kind of dilemma that behavioral economists love. With many Advantage plans, retirees accept the risk that they might pay $5,000 to $10,000 out-of-pocket each year in return for the chance of paying zero. With Medigap plans, retirees are willing to commit to paying about $1,800 a year if it means a strong probability of paying no more than that.

In keeping with the precepts of behavioral finance, most people prefer a possible loss (or expense) to a sure loss. Health professionals frequently recommend a Medigap “F” plan, however. The reason: Down the road, when your clients get sick, they might wish they had a more comprehensive plan with lower out-of-pocket expenses. But if they try to switch to such a plan during the annual enrollment window, insurers don’t have to accept their applications. Only during the initial enrollment, at age 65, are insurers required to accept you.

Trump’s Tax Plan and the Dollar

Posted on January 4, 2017 by Emmanuel Farhi, Gita Gopinath and Oleg Itskhoki -

Now that Donald Trump has been elected President of the United States and Republicans control both houses of Congress, corporate tax reform is coming to America. The package currently being discussed includes two important features:

A cut in the tax rate to 20%, or even 15%, from the current 35%
A “border-adjustment” tax, which is typical of a value-added-tax (VAT) regime, but unusual for corporate taxes

A border-adjustment tax would treat domestically purchased inputs and imported inputs differently, and encourage exports. Corporations would no longer be able to deduct the costs of imported inputs from their taxable income; but, at the same time, their export-sales revenue would not be taxed.

The proposal has generated an intense debate about whether it will improve the US trade balance. Having published our own work on “fiscal devaluations,” we believe that a border-adjustment tax would have minimal prospects for success, and that it could significantly undermine America’s net foreign-asset position.

The idea of using fiscal-policy instruments to improve trade competitiveness dates back to John Maynard Keynes. In his 1931 Macmillan Report to the British Parliament, Keynes proposed that an import tariff be paired with an export subsidy, which would mimic the effects of exchange-rate devaluation, while maintaining the gold-pound parity. In our own work, we have demonstrated that, in addition to this policy combination, countries that maintain a fixed exchange rate or are in a currency union can achieve the same effect by raising their VAT and cutting payroll taxes by equivalent amounts. This tax-swap policy has received a lot of attention in the eurozone, with Germany implementing it in 2006, and France in 2012.

The incoming Trump administration’s proposal to cut corporate-tax rates and impose a border-adjustment tax is similar to the VAT-payroll tax swap, because both strategies raise the cost of imports and subsidize exports. But we do not expect such a strategy to improve US competitiveness for the simple reason that the US authorities maintain a flexible exchange rate.

If Trump’s proposed tax reforms are implemented in full, the dollar will appreciate along with demand for US goods: a 20% tax cut will push the value of the dollar up by 20%. And this, in turn, will offset any competitiveness gains. The only way that this would not happen is if the US Federal Reserve prevented the dollar from appreciating by lowering interest rates. But this would fuel domestic inflation, so there is no reason to believe that the Fed would take such a step.

Thus, while a border-adjustment tax can benefit countries that have a fixed exchange rate or are in a currency union, it basically has nothing to offer countries with floating exchange rates, because the resulting currency appreciation offsets the fiscal devaluation.

But the effect of a US border-adjustment tax would not be neutral. An appreciating dollar would erode America’s net foreign-asset position, because an overwhelming 85% of its foreign liabilities are denominated in dollars, while around 70% of its foreign assets are denominated in a foreign currency. With US foreign assets amounting to 140% of its GDP, and its foreign liabilities amounting to 180% of GDP, a dollar appreciation of 20% would result in a capital loss equal to about 13% of GDP.

The fiscal consequences of Trump’s proposals would be mixed. On one hand, the border-adjustment tax could push up tax revenues, because the US imports more than it exports. With the US trade deficit at 4% of GDP, a 20% border-adjustment tax would create additional tax revenues equal to about 0.8% of GDP. On the other hand, the lower corporate-income-tax rate would decrease revenues and essentially cancel out any gains from the tax on imports.

To be sure, a border-adjustment tax would have other benefits that we have not discussed. It might generate additional tax revenues, by discouraging international companies from engaging in “transfer pricing” between their subsidiaries, or from shifting profits to low-tax countries. And, of course, lower tax rates could provide an economic stimulus and decrease the budget deficit.

But in terms of international competitiveness, the bottom line is that Trump’s proposed tax plan—particularly the border-adjustment tax—would most likely not have a positive impact on the US trade balance. Worse, it could be very costly in terms of US net foreign assets.

Emmanuel Farhi and Gita Gopinath are professors of economics at Harvard University. Oleg Itskhoki is a professor of economics and international affairs at Princeton.

“Hipsters, lend us your ears,” says Betterment

Posted on January 4, 2017 by Editorial Staff -

Podcasts are designed for hipster Millennials who wear earplugs and ride the Boston, New York and Bay Area rapid transit systems—when they’re not hailing an UberX or ordering a double soy latte from a barista. Maybe that’s why Betterment, which counts Millennials as a target market, has decided to produce financial podcasts.

CEO Jon Stein’s venture-backed, $6.5 billion-AUM virtual robo-advisor, which offers mass-customized portfolios of Vanguard funds from its bricks-and-mortar headquarters in refurbished lofts on 23rd St in Manhattan, has launched a podcast series, “Better Off.” The technology partner is DGital Media and the “host” is celebrity business analyst and certified financial planner Jill Schlesinger.

Episodes of “Better Off” became downloadable yesterday, January 5, from iTunes, Google Play, Spotify, Stitcher, TuneIn and other sources. Weekly episodes will last about 30 minutes each.

Those who download the podcasts will glean “unconventional and entertaining insights on money and life” from “thought leaders” in the fields of finance, entrepreneurship, sports, and show business, according to a Betterment release.

“Listeners will gain inspiration and actionable advice on how to reach personal goals (e.g., buying a home, paying for college, planning travel or enjoying retirement) from the guests,” according to the release.

Jill Schlesinger should be familiar to anyone who attends the major financial advisor conferences. She appears on CBS radio and television stations nationwide with glib commentary on the economy, markets, and investing. Her syndicated radio show, “Jill on Money,” is broadcast in some 95 media markets. LinkedIn included her among its “Top 10 Influencer Voices” for 2016 and 2017.

Betterment, which manages more than $6.5 billion in assets for more than 200,000 customers, offers portfolios of exchange-traded funds (ETFs) built by algorithms that are guided by client responses to a brief online questionnaire. It doesn’t manage money—client cash goes mainly into Vanguard ETFs. It also offers a white label robo-advice service for advisors and a low-cost 401(k) service.

In contrast to traditional fortress-websites like Vanguard’s and Fidelity’s, Betterment’s pastel-colored onboarding process makes investing as simple as signing up for a gym membership. Customers can open and customize regular investment accounts, traditional/SEP/Roth IRAs, trust accounts, and accounts for retirement income.

Betterment was a CNBC Disruptor 50, FT 300 and Webby award winner, and it has been featured in the New York Times, Forbes, the Wall Street Journal, Retirement Income Journal and elsewhere.

Economies of scale allow Vanguard to further reduce fund fees

Posted on January 4, 2017 by Editorial Staff -

Vanguard, the $3.6 trillion direct-sold fund supermarket whose founder, Jack Bogle, believed in sharing its economies of scale to its customers in the form of ever-falling prices, has further reduced the already ultra-low expense ratios on 35 individual mutual fund shares, including 11 exchange-traded fund shares (ETFs).

In a press release, Vanguard CEO Bill McNabb said the reductions were not “another volley fired in the fee war” but rather “business as usual” for the Malvern, Pa., firm, which has a mutual-like ownership structure. The cost reductions reflected growth of the funds via market appreciation, as well as strong cash inflows, according to the release.

According to one Bogle biographer, his commitment to low costs arose from a strategy to attract disaffected investors back to mutual funds after the deep 1974 bear market, and was enabled by the firm’s use of indexing, its low distribution costs and its ownership structure. )

Since 1975, when Vanguard managed just $1.8 billion in U.S. fund assets, the average expense ratio of its funds has fallen to 0.18% from 0.89%. On an asset-weighted basis, the average expense ratio is 0.12%. The fund industry average is 1.01%.

The low-cost strategy has paid off in positive fund flows. With 2016 net inflows of $253.5 billion through mid-December, Vanguard gathered more assets than the next nine largest fund companies combined. Investors have also favored ETF specialists like iShares and SPDR State Street Global Advisors and low-cost provider Dimensional Fund Advisors. Since 2004, Vanguard U.S. ETF assets have risen to $593 billion from $6 billion.

Expense ratio reductions for the 12 months ended August 2016 for a range of fund share classes (Investor, Admiral, ETF, Institutional, and Institutional Plus) in five fund categories included:

Bond index funds. Twenty-four Vanguard bond index fund shares reported lower expense ratios. The $18.7 billion Vanguard Short-Term Corporate Bond Index Fund reported the following reductions: Admiral Shares, three basis points to 0.07%; ETF Shares, three basis points to 0.07%; and Institutional Shares, three basis points to 0.05%. A basis point is one-hundredth of 1%.

Size/style equity index funds. Four size/style index fund shares that seek to track CRSP benchmarks reported lower expense ratios. The largest of these funds, the $2.3 billion Vanguard Mega Cap Growth Index Fund, reported that the expense ratios of its Institutional Shares and ETF Shares declined by 2 basis points, to 0.06% and 0.07%, respectively.

Social index. Two social index fund shares reported lower expense ratios. The $2.4 billion Vanguard FTSE Social Index Fund reported that the expense ratio of its Investor Shares fell three basis points, to 0.22%, while that of its Institutional Shares fell three basis points, to 0.12%.

Actively managed domestic equity. Three actively managed domestic fund shares reported lower expense ratios. The largest of these funds, the $6.6 billion Vanguard U.S. Growth Fund, reported that the expense ratios of its Investor and Admiral shares declined by one basis point to 0.46% and 0.32%, respectively.

Actively managed international equity. Two actively managed international fund shares reported a lower expense ratio. The $21.5 billion Vanguard International Growth Fund, reported that the expense ratios of its Investor Shares and Admiral Shares declined by one basis point to 0.46% and 0.33%, respectively.

Two Vanguard funds reported fee increases:
Admiral Shares of the $2.1 billion Vanguard Consumer Discretionary Index Fund and ETF Shares of the $6.2 billion Vanguard Health Care Index Fund each reported increases of 1 basis point, from 0.09% to 0.10%, for the fiscal year ended August, 2016.

The expense ratio changes were reported on Vanguard funds with a fiscal-year-end date in 2016 (in this instance, funds with a fiscal year that ends in August), according to a Vanguard release.

The Malvern, Pa.-based firm said it would announce any additional expense ratio changes as funds update their prospectuses in the coming months. Expense ratios are reported on an annual basis and are based on actual operating expenses for the prior fiscal year.

Bull market raises red flag: TrimTabs

Posted on January 4, 2017 by Editorial Staff -

TrimTabs Investment Research reports that U.S. equity exchange-traded funds enjoyed a net inflow of $59.9 billion in December, easily surpassing the previous record of $50.7 billion in November.

“Investor appetite for U.S. equities is seemingly insatiable,” said David Santschi, chief executive officer of TrimTabs. “U.S. equity ETFs have had inflows on all but six trading days since the U.S. presidential election, and the buying volume has been by far the strongest we’ve ever seen.”

In a research note, TrimTabs explained that the inflow of $110.6 billion into U.S. equity ETFs in November and December combined is equal to a stunning 7.2% of these funds’ assets.

TrimTabs also pointed out that last year’s fund flows reveal an overwhelming preference for passive U.S. equity products. U.S. equity mutual funds, most of which are actively managed, lost $233 billion in 2016, their third consecutive annual outflow. U.S. equity ETFs, almost all of which are passively managed, issued $169 billion, their seventh consecutive annual inflow.

“Fund flows tend to be a good shorter-term contrary indicator, so the post-election buying spree bodes poorly for U.S. equities,” said Santschi. “Also, selling that had been postponed late last year in anticipation of lower tax rates this year could put downward pressure on the market.”

Quote of the Week/Honorable Mention

Posted on January 4, 2017 by Editorial Staff -

Solash to manage AXA’s legacy book

Todd Solash, head of the Individual Annuity business at AXA, has been promoted to head a new Legacy Book Management Business Unit, reporting to AXA US Chairman and CEO Mark Pearson. Solash will manage AXA’s Legacy Life and Annuity business, according to a release this week.

Before joining AXA, Solash was a partner in the Insurance Practice of Oliver Wyman, where he served life insurers on a variety of strategy, product development and risk issues. Previously, he served on the executive committee of Jefferson National Life and in a variety of roles at that company.

Solash holds bachelor’s degrees in finance and chemical engineering from the University of Pennsylvania.

Standard Insurance introduces new fixed indexed annuity

Standard Insurance Company has introduced a single premium deferred index annuity with returns linked to the performance of the J.P. Morgan U.S. Sector Rotator 5 Index (Annuity Series).

The product, Strategic Choice Annuity 7, receives interest based on increases in the index, which uses dynamically adjusted investment allocations. Each month, the index adjusts to include U.S. sector funds that have exhibited the strongest performance.

Strategic Choice Annuity 7 uses a point-to-point account with a seven-year index term. Unlike the typical index annuity which credits interest annually but limits those credits by a cap, the Strategic Choice Annuity 7 has no cap and credits interest at the end of seven years, according to Rich Lane, senior director of individual annuity sales and marketing at The Standard.

“In addition, Strategic Choice Annuity 7 includes a Guaranteed Minimum Accumulation Benefit (GMAB), which guarantees that the annuity value will at least reach the guaranteed value of 107% of the original premium after seven years,” the Standard release said.

“The Index uses a momentum-based strategy, based on the proposition that assets with recent positive performance are more likely to continue such positive trends in the near future,” Lane said in the release. “This helps manage risk and reduces the potential for large index declines by allocating weights to selected sector funds.”

Liquidity provisions are built into Strategic Choice Annuity 7, including the ability to make withdrawals without a surrender charge after the first year if the owner is diagnosed with a terminal condition or is confined to a nursing home.

In November, money shifted from bonds to (passive) equities: Morningstar

Posted on December 22, 2016 by Editorial Staff -

Investors placed an estimated $41.9 billion into passive funds in November, lifting overall U.S. equity inflows to $20.7 billion, their highest tally in nearly two years, according to the latest asset flow report from Morningstar, Inc.

Assets continued to exit active U.S. equity funds for the 32nd consecutive month, with an estimated $21.2 billion in outflows in November, slightly down from October’s $23.5 billion outflow.

(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 November:

As investors expected that the Federal Reserve would soon raise interest rates, taxable-bond funds experienced $2.9 billion in outflows during November.
Municipal bond funds also took a toll, with $10.5 billion in outflows. This is the highest net redemptions for municipal bond funds since August 2013.
Investors favored more narrowly focused equity offerings, with $19.0 billion going into passively managed sector index funds.
Expecting a Trump administration to ease up on regulation of banks and brokerage firms, financial services passive strategies took in $9.1 billion.
For the first time in 2016, active intermediate-term bond funds saw monthly outflows, which totaled $4.0 billion in November. However, the category is in the black for the year with $46.8 billion of inflows.
The top active category with the highest inflows in November was ultra-short bond, which brought in $2.8 million.
Vanguard Group remains the top passive provider with inflows of $23.7 billion on the passive side, but the firm saw outflows of $3.3 billion on the active side.
Among individual funds, the bulk of the month’s inflows reflected broad market trends. The SPDR S&P 500 ETF topped passive funds for November with inflows of $7.5 million, followed by small-cap iShares Russell 2000 ETF with $6.2 million.
With the big rally in financial services stocks, the Financial Select Sector SPDR Fund is third with inflows of $6.1 million in November.
Market trends dominated outflow activity, with emerging markets and gold ETFs taking a hit, reflecting downdrafts in both markets.
In active fund outflows, Pimco Total Return and Templeton Global Bond Fund are both on the top-five redemptions list, continuing the recent trend of outflows for both strategies.

Xmas Cheer: The Debt Is Not Our Biggest Problem

Posted on December 22, 2016 by Kerry Pechter -

The nomination of Mick Mulvaney—deficit hawk, three-term Republican congressman from South Carolina and founding member of the House “Freedom Caucus”—to the cabinet-level directorship of the Office of Management and Budget is not good news for the financial system.

Mulvaney (at right) has said (and perhaps he even believes it) that one of the greatest dangers we face as Americans is the annual budget deficit and the $20 trillion national debt. This notion is an effective political weapon, but it’s dangerously untrue. If it were true, the country would have failed long ago.

Debunking this canard should be a priority for anybody who cares about retirement security. As long as we believe in the debt bogeyman, we can’t productively solve the Social Security and Medicare funding problems, or defend the tax expenditure for retirement savings, or even create a non-deflationary annual federal budget. Everything will look unaffordable.

Hamilton, the Broadway star

If you don’t believe me, believe Alexander Hamilton (below left). In 1790, the new nation was awash in government IOUs. It barely had two nickels to rub together for daily commerce. Hamilton, the impetuous future Broadway star, resolved the crisis with a simple argument. He reminded his fellow Founders that debts are also assets, and that the most secure assets are those that yield a guaranteed income stream from a sovereign government with the power to tax.

At the time, according to Hamilton’s “First Report on the Public Credit,” the U.S. debt in 1790 stood at $54.1 million and change. In that document, the first Treasury Secretary laid out his plan—over the protests of deficit hawks—to restore the debt’s face value, secure the new nation’s credit rating, and put new money into circulation through interest payments on the debt, with revenue from taxes on imports.

The plan worked. With its par value established, U.S. debt became—and still is—the basis of the nation’s money supply. “In countries in which the national debt is properly funded, and an object of established confidence, it answers most of the purposes of money,” Hamilton wrote. “Transfers of stock or public debt are there equivalent to payments in specie; or, in other words, stock, in the principal transactions of business, passes current as specie.”

Not a burden on our backs

Since then, during times of doubt, others have re-explained all this. In 1984, many people were panicking that the federal budget deficit had reached $185 billion. That July, economic historian Robert Heilbroner, author of “The Worldly Philosophers,” explained in a New Yorker essay that their fear was based on a misconception.

“The public’s concerns about the debt and the deficit arises from our tendency to picture both in terms of a household’s finances,” Heilbroner (right) wrote. “We see the government as a very large family and we all feel that the direction in which these deficits are driving us is one of household bankruptcy on a globe-shaking scale.”

That’s not so, he explained. The government is more like a bank, which lends by creating brand new liabilities. (You can also think of it as like the cashier at a casino, who has an infinite number of chips at her disposal.) “As part of its function in the economy, the government usually runs deficits—not like a household experiencing a pinch but as a kind of national banking operation that adds to the flow of income that government siphons into households and businesses,” he wrote.

“The debt is not a vast burden borne on the backs of our citizenry but a varied portfolio of Treasury and other federal obligations, most of them held by American households and institutions, which consider them the safest and surest of their investments.”

‘Heterdox’ economic view

Over the past 30 years, however, as the national debt has become a political football, this common-sense explanation of it has been suppressed. You hardly ever hear it articulated. It is kept alive mainly by “heterodox economists” like Stephanie Kelton and L. Randall Wray.

In the 2015 edition of his book, “Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems,” Wray explains the flaw in the idea that the deficit, the debt or the interest on the debt will eventually overwhelm us. It’s the kind of straight-line forecasting, he writes, that ignores self-limiting factors or feedback mechanisms.

“If we are dealing with sovereign budget deficits we must first understand WHAT is not sustainable, and what is,” Wray writes. “That requires that we need to do sensible exercises. The one that the deficit hysterians propose is not sensible.” He uses the analogy of Morgan Spurlock, the maker of the 2004 documentary, “Supersize Me,” to illustrate his point.

In the movie, Spurlock wanted to discover the effects of consuming 5,000 calories worth of food at McDonald’s every day. Wray points out that, if you ignored certain facts about human metabolism, the 200-lb Spurlock would inevitably weigh 565 pounds after a year, 36,700 pounds after 100 years and 36.7 million pounds after 100,000 years. Of course, that can’t happen.

“The trick used by deficit warriors is similar but with the inputs and outputs reversed,” according to Wray (left). “Rather than caloric inputs, we have GDP growth as the input; rather than burning calories, we pay interest; and rather than weight gain as the output we have budget deficits accumulating to government debt outstanding.

“To rig the little model to ensure it is not sustainable, all we have to do is to set the interest rate higher than the growth rate – just as we had Morgan’s caloric input at 5,000 calories and his burn rate at only 2,000 – and this will ensure that the debt ratio grows unsustainably (just as we ensured that Morgan’s waistline grew without limit).”

Fooling the people

Like any other threat, the debt’s scariness factor depends on how you frame it. The 2016 budget deficit was $587 billion, which sounds terrible. But that was just 3.3% of Gross Domestic Product. The U.S. debt reached $19.9 trillion in 2016, which also sounds terrible. But that is the amount accumulated since 1790. Our annual GDP is almost $18 trillion.

To enlarge the frame, we should include the whole “financial position” of the United States. According to Wikipedia, it “includes assets of at least $269.6 trillion and debts of $145.8 trillion. The current net worth of the U.S. in the first quarter of 2014 was an estimated $123.8 trillion.” In that context, neither the deficit nor the debt seem like terrible threats.

If you’re bent on making the math look scary, you can easily do it. As Wray noted above, “If the interest rate [i.e., costs] is above the growth rate [i.e., revenues], we get a rising debt ratio. If we carry this through eternity, that ratio gets big. Really big. OK, that sounds bad. And it is. Remember, that is a big part of the reason that the GFC (Global Financial Crisis) hit: an over-indebted private sector whose income did not grow fast enough to keep up with interest payments.”

But the government doesn’t face the same constraints as the private sector (which is why it could bail out the private sector in 2008-2010). Once you recognize that U.S. assets are huge, that U.S. debts are also private wealth, and that the debt will, as always, just need to be serviced and never be zeroed out, then today’s debt shrinks into the manageable problem that it is and not a source of panic. (Paying down the national debt—in effect, deleveraging the government—would be disastrously deflationary; that’s a topic for another article.)

So why do so many pundits and politicians, including the future director of the Office of Management and Budget, beat the debt drum so loudly and so often? The answer seems obvious. It provides an evergreen reason to delegitimize any and every type of government spending, regulation and taxation. It’s one of the most effective, and most abused, wedge issues in American politics.

AIG offers fixed-rate annuity with an income rider

Posted on December 22, 2016 by Editorial Staff -

American International Group, which sold $13.6 billion worth of annuities in the first three quarters of 2016—second to Jackson National’s $14 billion—has introduced a new seven-year fixed annuity with a lifetime income rider.

Issued by American General Life Insurance Company, Assured Edge Income Builder is available in over 20 banks and broker-dealers with “broadening of the distribution” in coming weeks, AIG announced this week.

Sellers of fixed-rate annuities, unlike sellers of variable or indexed annuities, do not have to satisfy the Best Interest Contract requirement of the new Department of Labor conflict-of-interest rule, which is set to go into effect next April unless it is frozen or unwound by the incoming Trump administration.

AIG sold $6.1 billion worth of variable annuities, $4.7 billion in fixed-rate annuities and $2.8 billion worth of indexed annuities in the first three quarters of 2016, according to the LIMRA Secure Retirement Index. No other issuer’s sales are so broadly diversified across all three types of annuities.

Although the product offers a low guaranteed annual return for the first seven years—at 1.50%, it’s well under what many predict will be the prevailing rates by the end of 2017—there’s a 7.5% simple-interest annual deferral bonus on the benefit base of the living benefit, which costs 95 basis points per year.

“The initial crediting rate for Assured Edge is currently set at 1.50% per year for a 7-year guarantee term. After that initial 7-year period we will declare renewal crediting rates annually,” said Brian Pinsky, senior vice president, individual retirement products at AIG, in a release.

According to product literature, there’s a market-value adjustment which may penalize surrenders when interest rates have risen) as well as a surrender charge during the seven-year contract period. The initial minimum premium is $25,000.

The payout rate is 5.6% at age 65 for single life contracts, and ranges from 4.1% at age 50 to 6.35% at age 80. At each age, the payout for joint life is .5% lower. The payout rate is based on the contract owner’s age at the time of purchase—not at the time when income begins, when owners will have significantly less life expectancy, on average.

Prevailing interest rates have been trending upward since mid-2016. The current yield on five-year AA-rated corporate bonds, according to Yahoo.com, is 2.41%. The Federal Reserve is expected to raise its benchmark rate at least twice in 2017.

A product like Assured Edge would produce less guaranteed annual income than a deferred income annuity, but offer liquidity during the income period. Purchased at age 65 with a $100,000 premium, Assured Edge would produce an annual income of $9,800 after a 10-year deferral for a single person.

A DIA would produce significantly more monthly income. According to immediateannuities.com, a single-male-life-with-cash-refund DIA with a $100,000 premium would pay out about $12,000 a year after a 10-year deferral period. Death of the contract owner, before or after the income start date, would result in the return of unpaid premium.

New York Life offered its version of fixed annuity with a lifetime income rider in 2015. Called Clear Income, it offers a 5% compound annual growth in the benefit base during a 10-year deferral period. The payout rate is based on the age of first withdrawal; at age 65, it is 5.5% for a single life and 5.0% for a joint life policy. The minimum premium is $50,000.

Honorable Mention

Posted on December 22, 2016 by Editorial Staff -

Security Benefit’s new FIA loads income into ‘go-go’ years

On the premise that many retirees will spend more during the globe-trotting, grandchildren-spoiling “go-go” ages of 60-something to 70-something, Security Benefit Life has launched a fixed index annuity (FIA) with a living benefit option that over-weights income in the first 10 years of retirement.

The product, Select Benefit Annuity, has two income riders. There’s an Accelerated Income Rider where income drops by half after 10 years. The product also offers an optional Legacy Preservation Rider for clients whose bequest motive is greater than their income motive, according to a press release. Both riders offer deferral bonuses.

Purchase payments can be allocated among seven available interest crediting options based on two custom indices: the S&P 500 Low Volatility Daily Risk Control 5% Total Return Index Account (1 year and 2 year options) and the UBS Market Pioneers Index Account (1 year and 2 year options).

The new product features nursing home and terminal illness waivers, as well as a free withdrawal, beginning in the first contract year, of up to 5% of the purchase payment (for the first year) or the prior year’s contact anniversary account value beginning in the second year.

New ERISA safe harbor for municipally sponsored IRAs

The U.S. Department of Labor’s Employee Benefits Security Administration will issue a final rule making it easier for cities to establish payroll deduction individual retirement account savings programs for workers who do not have access to workplace savings arrangements.

New York, Philadelphia and Seattle have shown interest in establishing these programs.

The new rule, which amends a similar rule related to state savings initiatives published earlier in 2016, shows “eligible cities and other political subdivisions” how to design an local IRA program in a way that will not expose employers who participate in the program to regulation by the federal Employee Retirement Income Security Act of 1974 (ERISA).

In addition to exempting employers from ERISA, the new rule “protects workers’ rights by ensuring they have the ability to opt out of auto-enrollment arrangements.” The rule will go into effect 30 days after its publication in the Federal Register.

Under the final rule, cities with populations “at least as large as that of the least populous of the 50 states,” whose state doesn’t already have a payroll deduction IRA plan of its own, that have experience sponsoring a plan for employees, may be eligible to enact IRA programs.

Global Atlantic enhances product line with new income annuity

Global Atlantic Financial Group, which was founded at Goldman Sachs in 2004 and became independent in 2013, has launched ForeCertain, a new, single-premium income annuity issued by Forethought Life Insurance Company.

ForeCertain is available in 49 states and the District of Columbia. Forethought Life Insurance Company does not issue in New York. A fee-based version of ForeCertain will also be available, with the same flexible features and options.

The product “can serve as a single premium immediate annuity or a deferred income annuity. This product was a missing piece in our comprehensive annuity platform that also includes fixed, fixed index and variable annuities, as well as a fixed annuity with long-term care benefits,” said Paula Nelson, head of Retirement Distribution at Global Atlantic, in a release.

Prudential offers low-cost target-date funds

Prudential Investments has launched the Prudential Day One Mutual Funds, 12 target date funds that will be available through group retirement plans and financial intermediaries.

A release from Prudential Investments, the retail distribution business of PGIM, the global investment management businesses of Prudential Financial, Inc., said that Day One Mutual Funds “address the risks faced by participants in three stages of retirement planning,” including:

Accumulation: Higher equity exposure for younger participants to mitigate the risk of not saving enough.
Preservation: Lower equity exposure for near-retirees to mitigate the risk of significant market losses.
Inflation Protection: Focus on assets that mitigate the erosion of purchasing power during retirement.

The suite features 12 target date mutual funds and is available in five-year increments, ranging from 2010 to 2060, in addition to an income fund. The expense ratio is 0.40 percent (in the lowest priced share class, R6i), ranking it among the lowest in cost (top 13%) for open-ended funds within the Morningstar Target Date Funds Institutional Share Class, the release said. The funds are currently offered through collective investment trusts and separate accounts and have grown almost 40% since Dec. 31, 2014, surpassing $1 billion in assets.

RIJ will return on January 5

Posted on December 22, 2016 by Editorial Staff -

Policy Forecast: Gloom with a Chance of Doom

Posted on December 21, 2016 by Kerry Pechter -

Gloomy. That was the mood among retirement policy mavens at the Employee Benefits Research Institute’s 79th Policy Forum in Washington, D.C. last week. They seemed equally glum about America’s retirement savings shortfall and about the low priority of retirement savings on the Republican policy agenda.

“Although we [in this room] spend a lot of time talking about retirement,” said Brian Graff, the CEO of the American Retirement Association, which represents retirement plan advisors, “the people who are in a position to do something about it are not talking about it.”

As for the savings shortfall, EBRI research chief Jack Vanderhei’s slide presentation showed that, at best, only the richest quarter of American Boomers and Gen-Xers are on track to retire safely at age 65. “As depressing as these numbers are, they are wildly optimistic,” he said to a chorus of weak laughter.

It must be remembered that this audience consisted of D.C. public policy veterans who face a new government dominated by folks who don’t believe that government should set public policy at all, except perhaps foreign policy, and who prefer to cut taxes than bolster the existing subsidies for retirement savings or Social Security.

To be sure, many in Washington are undoubtedly celebrating the prospect of lower taxes, deregulation, normalized interest rates, a burst of fiscal stimulus, the repeal of “Obamacare,” and “entitlement reform.” But only a handful of the 100 or so people at EBRI’s half-day forum, which included a 90-minute roundtable discussion on federal retirement policy, would likely be among them.

A reluctant piggy bank

Fear exists in the retirement industry that tax deferral on retirement savings, the subsidy that underpins the retirement industry, could become a victim of tax reform during the next two years. Tax deferral deprives the government of an estimated $100 billion in tax revenue per year. (That figure ignores taxes on distribution and doesn’t necessarily imply that revenue would rise by $100 billion if tax deferral were eliminated.)

“It is incomprehensible that Congress won’t go after retirement plans in tax reform,” said Randy Hardock, an ERISA attorney at Davis & Harmon LLC in Washington, who was part of the roundtable. He pointed to the 2014 tax reform proposal put forward by former Michigan congressman Dave Camp, which would switch to a Roth-based system where contributions, not distributions, would be taxed as income.

“That would raise $250 billion over 10 years,” Hardock said. “We’re a big piggy bank that they can use for tax reform. That’s how we’re being viewed. We’re viewed as this big attractive piggy bank that they can use for their own priorities. But this has been going on for decades. When they want to pay for something, we’re seen as a big pocket of revenue. Indifference to retirement is our big problem.”

Graff agreed with that assessment. “You have chairman [Kevin] Brady [of the House Ways and Means Committee], who wants to make the tax code simple enough to fit on a postcard, talking about the importance of saving. But the conversation isn’t about retirement savings. It’s about increasing savings by reducing taxes on investments. They want to lower rates on short-term investments and they want to lower corporate rates. If that’s going to be revenue neutral, the money has to come from someplace, and it will be from us.”

Mandates are controversial

Lack of access to a formal retirement savings plan at work affects about half of U.S. workers at any given time. Expanding coverage to all workers, all the time, is widely seen as the best way to increase Americans’ preparedness for retirement and minimize the number of people who might wind up indigent and state-dependent in old age.

Various strategies to expand coverage, such as introducing state-sponsored defined contribution plans, or special “marketplaces” for retirement plans, or an “auto-IRA” for workers at small companies, are being tried. Some ideas call for auto-enrollment, others for a “mandate” to make plans available at all firms.

“We need auto enrollment, escalation, and auto-distribution,” said David John, a senior advisor at the AARP Public Policy Institute. “Look, Social Security doesn’t provide enough for everyone to have comfortable retirement, especially in bottom quartile. So we need a mandate, though not necessarily through employer.

“It’s time to move to employer-facilitated plan [from employer-sponsored plans],” he added. “We’re starting to see seeds of that emerging through the state-sponsored plans. Employers would still have the option to create 401(ks) if they think it will attract better employees.”

But mandates are anathema to the free-marketers who now control the U.S. government. “Do we mandate plans across America? Do we mandate certain types of plans? That will just make the situation worse by taking flexibility away from employers,” said Will Hansen, senior vice president of Retirement Policy for The ERISA Industry Committee.

“We have a coverage gap because of overregulation. We’re making it too complicated to provide plans. When employers provide a retirement plan, it’s part of a larger compensation package. Employers need flexibility in shaping compensation packages.”

“Because of the [enrollment mandates in the] Affordable Care Act, mandates have become so controversial. The fiduciary rule has also gone down that path,” said Hardock, adding that retirement issues were not even mentioned during the presidential campaigns. “Somehow [we] have to find a way to get them back on the priority list. We’ve lost our way. We’ve gotten sucked into partisan debates over the appropriate role of government instead of working together on solutions,” he said.

“Congress doesn’t have capacity or volition to focus on coverage for small employers and part-time workers,” said Alane Dent, vice president for Federal Relations at the American Council of Life Insurers.

Social Security reform?

Although Donald Trump the candidate promised to protect the Social Security system, the Republican chairman of the House Freedom Caucus, Mark Meadows, said his group would push for an overhaul of Social Security and Medicare in the next Congress. A recent proposal by Sam Johnson, chairman of the House Social Security subcommittee, includes cuts to Social Security benefits rather than new revenue.

But not everyone wants to get into that political minefield, according to Shai Akabas, director of fiscal policy at the Bipartisan Policy Center. “Social Security reform will be incredibly hard to get before 2034,” he said. “Republicans want to cut benefits and Democrats want tax increases, but those are both terrible news headlines. It will be necessary to pair action on Social Security with action on the private pension side. There are positives to talk about on the private pension side, and that’s where Congress will go.”

Josh Gotbaum of the Brookings Retirement Security Project agreed. “Making decisions about private pensions—like, how do you set up an automatic saving system that doesn’t impinge much on employers—is an order of magnitude easier than changing Social Security. We shouldn’t hold private pensions hostage to Social Security reform. In any case, there’s not a sufficient crisis yet to force Congress to solve Social Security.”

But Social Security’s funding problems—by 2034, unless current laws change, it will only have enough revenue to fund about 75% of promised benefits—should be politicized but should be seen as a non-partisan demographic issue, said Eugene Steuerle, an economist at the Urban Institute.

“In the near future, we’re going to have a third of the adult population on Social Security for one-third of their lives,” Steurele said. “That won’t work. Retirees now have 12 more years of leisure in retirement than they did when Social Security was enacted. And since then, the birth rate has fallen to two children from three children per female.

“For a few decades, the arrival of women in the workforce provided the extra labor, but we won’t get any additional gains from women in the future, and the baby boomers are retiring,” he added. “You can’t solve these problems if you don’t have enough workers. You can’t build the retirement policy of the future on the demographics or the labor force of the past.”

Financial institutions brace for DOL haircut

Posted on December 21, 2016 by Editorial Staff -

With its controversial fiduciary rule, the Department of Labor quite openly intended to trim the cost of investment services for IRA owners. Little surprise, then, to find that some financial institutions are bracing for a revenue haircut next spring.

For example, a recent survey of executives at banks and credit unions showed that the typical U.S. financial institution can expect a 17% fall in revenue from investment services because of the impact of the DOL rule—assuming that the rule survives within a business-friendly Trump administration.

The executives were participants in the Kehrer Bielan DoL Readiness Roundtable: Gut Check at the Halfway Mark. A proprietary calculator enabled them to estimate the impact of the DOL rule on their firm, based on specific details about the firm’s investment services business (characteristics of its advisor force, business mix, pricing, etc.) and the firm’s efforts to comply with the rule, which takes effect in April 2017.

“The calculator will let [each firm] specify the parameters of its business model and assess the impact of the actions it is contemplating… By identifying the revenue shortfall it will help quantify the actions needed to close the gap,” said Peter Bielan, a principal of the firm.

One participant in the survey argued that net revenue might fall even further at firms that have already standardized payouts to their advisors. If annuity providers subsequently levelize (and reduce) payments to the firms, the firms could be squeezed between reduced revenues and fixed expenses.

Another participant doubted that the “reasonable fees” requirement under a Fiduciary Standard would necessarily reduce revenue. Under the DoL Rule, he argued, firms would have to eliminate discounting of fees.

The loss of revenue from small accounts was taken into account in the projections, as was the potential increase in advisor productivity because advisors may no longer service less-productive accounts.

The Kehrer Bielan DoL Readiness Roundtable: Gut Check at the Halfway Mark was held December 13-14 at Fearrington Village near Chapel Hill, North Carolina.

Trump rally could be sign of trouble ahead: TrimTabs

Posted on December 21, 2016 by Editorial Staff -

U.S. equity exchange-traded funds received a record $97.6 billion from Tuesday, November 8 to Thursday, December 15, according to TrimTabs Investment Research.

“ETF flows tend to be a good contrary indicator when they become extreme, so the buying frenzy doesn’t bode well for U.S. equities,” said David Santschi, CEO at TrimTabs.

“The market also could get a nasty jolt in January, when investors who’ve been postponing stock sales this year in anticipation of lower tax rates next year start to sell.”

“The stampede into U.S. equity ETFs since the election has been nothing short of breathtaking,” he said in a release. “The inflow since Election Day is equal to one and a half times the inflow of $61.5 billion in all of last year. One has to wonder who’s left to buy.”

The inflow into U.S. equity ETFs since Election Day is equal to 6.3% of these funds’ assets, according to TrimTabs’ research note. By mid-month, December’s inflow had already reached $43.4 billion; the record monthly inflow is $50.7 billion, set in November.

U.S. equity ETFs have had outflows on only three trading days since the presidential election, and inflows swelled to $27.8 billion on the five days ended Thursday, December 15. It was the highest weekly inflow in four weeks.

Will your grandkids shop for annuities on Amazon?

Posted on December 15, 2016 by Editorial Staff -

Amazon may not start delivering annuity contracts by aerial drone anytime soon, but the all-consuming online retailer, along with Walmart, Google and Apple, all represent big threats to slow-footed insurers in the near future, according to rating agency A.M. Best.

Indeed, U.S. life insurers must undergo a “rapid, strategic evolution” if they hope to remain profitable in the face of new types of competition, changing demographic and macroeconomic conditions, and new regulatory challenges, according to a new A.M. Best special report.

Affinity groups, retailers and online comparison platforms are already posing distribution competition to U.S. life insurers, said the report, entitled “Shifting Dynamics Could Lead to Distribution Channel Innovation.”

“Larger retail stores like Walmart offer automobile and health insurance products; however, other retail chains like Costco and affinity organizations such as AARP offer a more diversified suite of products that include life and other insurance lines.

“Another consideration is the presence of Amazon, Apple and Google, which have strong balance sheets with large databases of customer information, superior technological resources and a significant amount of excess capital.

“Should they decide to make a large scale entrance into the insurance marketplace, this could further disrupt the current U.S. life insurance distribution model, which historically has been slow to adapt and is hindered by inefficient legacy systems,” A.M. Best said in a release.

Finding new insurance agents is another challenge. According to a recent A.M. Best survey, the top three concerns in recruiting new agents for life/annuity insurers, according to an A.M. Best survey, include:

Difficulty in attracting younger talent (32.3%)
Recruits lack needed sales skills (24.2%)
Recruits lack of knowledge of the insurance industry (21.0%)
The current force is aging: 62.5% of producers age 50+; only 3.1% are under 35.

Broker/dealers accounted for the largest allocation of New Business Annualized Premium, at nearly 30% in 2015, A.M. Best has found. Some insurers had been acquiring independent broker/dealers in previous years as they searched for new distribution outlets, though many have since disposed of them due to the 2008 financial crisis.

That might not be the right culture match, however. “A.M. Best remains somewhat concerned about the financial consequences for insurers who continue to own and operate independent broker/dealers, and believes additional fines are possible as a result of the recent scandal related to the opening of fake unauthorized accounts at Wells Fargo. The U.S. Department of Labor’s fiduciary rule gives further reason for insurers to consider separating themselves from this distribution outlet,” the release said.

Parts of the insurance sales process may shift to the internet or be assumed by artificial intelligence, the release said, but “continued investment in people, process and technology, such as the potential integration of model validation with data analytics and predictive modeling, likely will lead to improved sales and underwriting results.”

Calculating After-Tax Social Security Benefits

Posted on December 15, 2016 by Kerry Pechter -

A healthy 75-year-old I know has few if any financial worries. He is a partner in a successful plastics factory. He owns a share in a ranch out West. He even has a climate-controlled garage full of new and vintage sports cars.

His main issue, of course, is taxes. He recently complained about how much tax he pays on his Social Security benefits. “There’s almost no benefit left,” he said. But he said it with a dry smile. He knows that the OASDI system wasn’t designed with him in mind.

Yes, many people, including perhaps most of your clients, will earn enough in retirement to owe taxes on as much as 85% of their Social Security benefits.

How much will they pay? A handy crib-sheet recently published by Vanguard shows the formulae for calculating the portion of an individual’s or couple’s Social Security benefits that will be subject to ordinary income tax.

The first step is to calculate the client’s Provisional Income. This is the sum of the client’s Adjusted Gross Income (including realized capital gains), plus the interest they receive from tax-exempt bonds, plus one-half of their Social Security benefit.

Depending on the level of Provisional Income (and depending on whether the client is single, a married couple filing jointly, or a couple filing separately), as little as 0% or as much as 85% of the Social Security benefit will be subject to federal income tax. If a couple’s PI exceeds $44,000, then up to 85% of the Social Security benefit will be taxable (See table below).

The exact percentage of Social Security income that’s taxable, according to Vanguard, is the smallest of the following three calculations:

85% of Social Security benefits.
50% of Social Security benefits + 85% of Provisional Income over $34,000 (for singles) or $44,000 (for couples filing jointly).
50% of PI over $25,000 (single) or $32,000 (married, filing jointly) + 35% of PI over $34,000 (single) or $44,000 (married, filing jointly).

For example, consider a couple with $40,000 in AGI from part-time income, capital gains, and Required Minimum Distributions, $20,000 in interest from municipal bonds and $28,000 in Social Security benefits, after deductions and exemptions. The Provisional Income would be $74,000. How much of their benefits would be taxed?

Under Calculation 1 above, 85% of the Social Security benefit or $23,800 would be taxable.
Under Calculation 2, ($25,500 + $14,000) $39,500 would be taxed.
Under Calculation 3, ($21,000 + $10,500) $31,500 would be taxed.

So, in this case, $23,800 of their Social Security benefit would be taxed. The couple’s taxable income would be $23,800 + $40,000 = $63,800. Given the current tax brackets, they would owe $6,787, or 15% of the amount over $18,550 ($45,250). (In this case, the tax on their capital gains and ordinary income would both be 15%). Of that $6,787, roughly 40% or $2,720 could be thought of as a reduction in their Social Security benefits. (We’re excluding the impact of Medicare-related deductions or taxes.)

So, even without legislating any changes in the calculation of Social Security benefits, the federal government, by the way it taxes those benefits, already claws back part of the payout and, in effect, makes the system marginally more progressive.

Ascensus to run Oregon’s public DC plan for private-sector workers

Posted on December 15, 2016 by Editorial Staff -

Ascensus was chosen this week as plan services provider for the Oregon Retirement Savings Plan, a state-sponsored defined contribution plan option that is preparing for a July 2017 launch.

Passed by the 2015 Legislature to address the crisis of inadequate savings, the Oregon plan will be available to the more than half of the Oregon workforce that does not already have access to a retirement savings plan at work.

Eligible workers will automatically defer a portion—initially 5%percent—of their paychecks deposited into their own secure retirement accounts, unless they opt out. An estimated 64,000 businesses, most them small, are expected to have employees eligible to participate.

Pennsylvania-based Ascensus is the nation’s largest independent retirement and college savings services provider, with more than $139 billion in assets under administration. The firm is helping seven million Americans save for the future, in partnership with financial institutions.

The Oregon Retirement Savings Board conducted a public request for proposals this fall for a firm to manage the account records, operate the website, and receive and process the retirement payments for what will be the first operating state-sponsored retirement savings plan.

As part of the successful bid, the company will absorb early startup costs and be repaid over the life of the contract. The company will collect a small annual fee from retirement accounts to cover the cost of administration, recordkeeping, marketing, and the package of investment options made available to retirement savers. The value of the contract ultimately will be based on the number of participants and assets invested.

Ascensus provides recordkeeping, administrative, and program management services to some 46,000 retirement plans and over 3.8 million 529 college savings accounts. It also administers more than 1.5 million IRAs and health savings accounts and is a major ERISA consultant.

Oregon officials been meeting with representatives of employers, workers, payroll administrators and consumer groups to guide the formation of the program. It is estimated that– most of them small businesses — will have employees eligible to participate in the plan.

A hearing will be Dec. 15 to collect feedback to a detailed draft of administrative rules, and written comments will be accepted through Dec. 23.

The Oregon plan will impose no fiduciary risk to employers, and clerical responsibilities will be kept low. The plan will not be a pension, is not linked to the Oregon Public Employee Retirement Fund, and will not offer any matching funds or any guarantee of performance by the state or by employers.

Charles Schwab offers hybrid-robo with $25k minimum

Posted on December 15, 2016 by Editorial Staff -

Charles Schwab has launched Schwab Intelligent Advisory, a hybrid, low-cost financial and investment planning advisory service that combines live licensed Certified Financial Planners (CFP) and algorithm-driven technology. The service is expected to launch in the first half of 2017.

The service, according to a Schwab news release this week, is designed for “an emerging or mass affluent investor focused on keeping costs low who doesn’t have a highly complex financial situation.” There will be a $25,000 investment minimum.

New clients will complete a self-guided online planning tool focused on their specific financial situation and goals including both Schwab and non-Schwab accounts, followed by a one-to-one conversation with a credentialed Planning Consultant.

Clients will have access via phone or videoconference to a team of CFPs who can answer questions and make recommendations about financial goals and saving targets, retirement planning, college savings, long-term care planning, and budgeting. Check-ins with CFPs will typically occur annually, but clients also have access to live 24/7 service support via phone, chat, and email.

Most clients will be invested in a fully automated, diversified portfolio using Schwab Intelligent Portfolios comprised of exchange-traded funds (ETFs) from Schwab, Vanguard, iShares and PowerShares.

Investors will have access to up 20 globally diversified asset classes in each portfolio including equities, fixed income, real estate, commodities, and an FDIC-insured cash allocation to manage volatility and risk. Clients can activate automated tax-loss harvesting for each account starting at $50,000.

Advisory fees under Schwab Intelligent Advisory are 0.28% of a client’s managed assets with a $900 quarterly fee maximum. The service will charge no trading commissions or account service fees. The weighted average operating expense ratios for the portfolios currently range from 0.08% for a conservative portfolio, 0.19% for a moderate portfolio, and 0.24% for an aggressive portfolio.

Every aspect of the service is designed to be paperless, to allow desktop and mobile access, and to allow automated account funding on a recurring basis, as well as fund accounts using mobile check deposit.

Fitch reviews impact of DOL rule on wealth managers

Posted on December 15, 2016 by Editorial Staff -

Wealth managers will see differing costs and benefits from the introduction of the Department of Labor’s (DOL) “fiduciary rule,” says Fitch Ratings, which added that it’s too soon to speculate about whether the incoming Trump administration will try to reverse the Obama administration’s rule.

The new DOL rule pertaining to conflicts of interest in retirement advice is due to begin to come into effect in April 2017 and will require wealth managers to maintain a fiduciary standard for clients’ retirement accounts. Wealth managers who manage discretionary retirement accounts will be legally held to higher fiduciary standards and required to make full disclosures regarding conflicts of interest and fees.

In response to the new rule:

Bank of America and JP Morgan Chase have announced that they will move to a purely fee-based model for retirement accounts with set fees charged as a percentage of assets.
Wells Fargo recently announced that it would continue to allow brokers to charge per-transaction commissions.
Morgan Stanley and Edward Jones have also announced that they would maintain commission-based compensation models for retirement accounts.

Depending on whether they pursue a fee-only or commissions model in response to the DOL rule, wealth managers may benefit or suffer, said a Fitch release.

“Switching to fee-based compensation will mean a simpler product structure and would make revenue generated from these accounts more recurring and potentially more predictable,” the release said.

“A fee-based structure could also mean less opportunity for brokers to overtrade client accounts, thus reducing potential legal liability from the introduction of the fiduciary standard. However, these financial institutions could risk losing brokers or smaller clients who do not benefit directly from the introduction of fees.

“Those institutions sticking with commissions will see greater broker retention. It will be more cost-effective for clients who have limited trades per year. However, interactions and account orders will need to be well documented to ensure higher compliance standards are met, and this will come with greater operational, compliance and legal costs.

“Notably, the potential cost of noncompliance could be a significant legal liability. The DOL rule could also have indirect effects on segments of the financial industry not directly targeted by the rule. Investment managers could face further outflows from actively managed products in favor of passive products deemed to more easily satisfy the fiduciary standard.

“That could pressure investment managers’ fee rates. Insurers too could see an increase in compliance costs from the DOL rule as well as changes in some sales practices, although Fitch maintains that the rule is ratings neutral for that sector.”

NAFA elects new board members

Posted on December 15, 2016 by Editorial Staff -

The general membership of NAFA, the National Association for Fixed Annuities, approved recommendations for its newly elected 2017 board of directors at the association’s recent annual meeting in Phoenix, Ariz. The five members who will take office at the start of 2017 include:

Margo Thompson of The Annuity Source, Inc.
Lauri Beck of Insurance Network America
Heather Kane of EquiTrust Life Insurance Co.
Jeff Maxey of InsurMark
Mike Morrone of Nationwide

Brian Mann of Partners Elite Advisory Group will assume the role of chairman of the board of directors, succeeding Nathan Zuidema of Imeriti Financial Network. Dominic Cursio of M3 Financial, Inc will be vice chair, Jim Maietta of Allianz will be secretary, and Chris Conroy of CreativeOne will join the executive operating committee as treasurer.

NAFA membership approved the rest of the board roster:

Cary Carney of Voya Financial
Tony Compton of Great American Insurance Group
Rich Lane of Standard Insurance Company
Eric Marhoun of Fidelity & Guaranty Life
Randy Matzke of Advisors Excel
Paul McGillivray of M&O Marketing
Kevin Mechtley of North American Company for Life and Health Insurance
Kirby Wood of American Equity

Exiting board members were Chris Johnson formerly with National Western Life, Rod Mims of Athene Annuity & Life Assurance Company, Harry Stout of NelsonWells, LLC, and Eric Taylor of AIG Life & Retirement.

Solash to manage AXA’s legacy book

Standard Insurance introduces new fixed indexed annuity

Security Benefit’s new FIA loads income into ‘go-go’ years

New ERISA safe harbor for municipally sponsored IRAs

Global Atlantic enhances product line with new income annuity

Prudential offers low-cost target-date funds

Data Connection

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