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Northwestern Mutual starts $50 million fintech venture fund

Northwestern Mutual, which embraced the digital revolution by buying LearnVest in 2015, said it will create a $50 million venture capital fund, Northwestern Mutual Future Ventures, to bankroll “startups whose technologies have the potential to transform how consumers experience and achieve financial security.”

Northwestern Mutual has been “ramping up investments in and relationships with early stage companies” following the LearnVest acquisition, according to a release. Investments will range from $500,000 to $3 million. From the insurer’s release, its focus appears to be on digitizing internal capabilities rather so-called robo-advice per se.

Other firms are aggressively pursuing more sophisticated information technology solutions. Vanguard recently created a Center for Investor Research. It will examine how investors make decisions through observational studies based on Vanguard’s administrative data and the growing pool of digital interactions.” 

When RIJ asked Vanguard recently if it were exploring the use of “chatbots,” which are chat windows where bots can engage in human-like text-based exchanges with client, a spokesperson for the mutual fund giant wrote:

“Vanguard continues to utilize new and innovative technologies in an effort to best serve our clients. As such, we are currently exploring the potential business applications of voice or text-recognition software.”

The new Northwestern Mutual fund has four priorities, the Milwaukee-based mutual insurer said: “Consumers’ changing preferences, re-imagining the client experience, the digital health revolution, and transformational analytics and technologies.

“This multiyear commitment will focus on innovation to build greater digital relevance for clients, increase data-driven decision making and create back-end efficiencies with the goal of creating greater value for [Northwestern Mutual’s] more than 4 million clients.”

© 2017 RIJ Publishing LLC. All rights reserved.

More than one-in-four seniors never expect to be debt-free

There’s an adage that “they who are not in debt are rich.” If true, a growing number of Americans expect to die rich. Only 12% of U.S. adults with debt today expect to die in debt, according a survey by CreditCards.com. But they may be kidding themselves.

Although that figure was six percentage-points higher than in a November 2015 survey, it’s an average of responses from all ages. Among people age 65 and older, 28% said they “never expect to get out of debt.” (In late 2015, 35% felt that way.)

The survey added to the already ample evidence that many Americans are financially underprepared for retirement. Debt and savings conflict: Over 70% of those surveyed by CreditCards.com said that if their debt vanished, they would save the windfall. Almost half (32%) would save for retirement. Others would save for emergencies (15%), a new home (14%) or college tuition (12%).

The youngest adults surveyed (ages 18 to 29) were the most optimistic about dying in the black, but that figure may simply reflect a blissful ignorance about expenses that they haven’t encountered yet. According to the survey, which did show improvement:

  • 14% of those ages 50 to 64 never expect to get out of debt (down from 24%).
  • 11% of those ages 30 to 49 never expect to get out of debt (down from 19%).
  • 4% of those ages 18 to 29 never expect to get out of debt (down from 11%).

Eight years after the financial crisis, the nation’s overall debt profile continues to improve. In the last two years, the percentage of American adults carrying credit card debt, car loans, student loans, mortgages, or other personal debt fell to about 75% from 86%.   

But if you unpack that number, you find that “credit card debt has been rising steadily for more than five years and is close to $1 trillion, according to the Federal Reserve,” said Matt Schulz, a CreditCards.com analyst, in a press release. “It seems like a lot of people are forgetting the painful lessons of the Great Recession.”

Twelve percent of Republicans, 11% of independents and 10% of Democrats surveyed said they will never get out of debt, down from 25%, 21% and 14% in late 2015, respectively.

Just as many people rate themselves better-than-average drivers and lovers, many people believe they are less leveraged than their peers. Only 9% of U.S. adults say they carry more debt than their closest friends and family, while 48% say they owe less and 37% think they owe about the same amount, the survey showed. Princeton Survey Research Associates International conducted the survey for CreditCards.com.

© 2017 RIJ Publishing LLC. All rights reserved.

LOMA issues ‘Forecast for the Life Insurance Industry’

Trends set in the life insurance industry in recent years will continue, with small to modest gains in most product lines, according to 14 senior executives surveyed by LOMA’s Resource magazine.

The executives, from life insurers and consulting firms, shared their views on sales expectations, technology, customer service, human capital and other issues for the magazine’s 2017 Forecast for the Life Insurance Industry.

“We would expect under two percent growth in North America, with larger single-digit growth in the developing world,” said Tom Scales, Research Director, Celent and a Forecast participant. “We also see the industry continuing to struggle with low interest rates.” There may be a very gradual move to modestly higher rates, he added.

Other predictions from the executives:

  • Intelligent underwriting. Technology will continue to transform the industry, and there is particular interest in intelligent underwriting, which can shorten the new business cycle. Big data, predictive analytics, mobile, and social media will play an increasing role in communicating with customers.
  • 24/7 customer service. Companies are beginning to embrace 24/7 customer service, via the customer’s preferred channel and device. There is recognition that companies need to be focusing on the “customer experience,” not just a service transaction.
  • There are varied opinions as to what may happen with the DOL fiduciary rule, due to the new administration.

© 2017 RIJ Publishing LLC. All rights reserved.

A.M. Best forecasts life insurance industry M&A

The pace of merger & acquisition (M&A) activity in the life/annuity (L/A) industry faced headwinds from low interest rates and the regulatory environment, according to a new A.M. Best briefing.

The Best’s Briefing, titled, “Mergers and Acquisitions in the Life/Annuity Marketplace,” stated that the Department of Labor (DOL) fiduciary standard had contradictory effects on the industry. It was a catalyst for distribution-centered M&A, but also reduced block transactions or whole company acquisitions.

The industry continued to grapple with DOL readiness and implementation in 2016. The DOL was a significant distraction and consumed management resources for annuity companies throughout the year.

Due to prolonged low interest rates, mega-sized pension risk transfer (PRT) deals were modest in 2016, with the exception of MetLife and MassMutual’s partnership to execute a joint $1.6 billion PRT transaction and Prudential Financial’s $2.5 billion PRT transaction with WestRock Company.

The overall pace of PRT activity through September 2016 was comparable to the prior year. The MetLife-MassMutual transaction represented the first sizable joint M&A transaction in the U.S. market for PRT, and A.M. Best believes it is “an important step in capital markets risk transfer, which will likely be necessary for the PRT marketplace to mature in the U.S. market over time.”

Disruption from financial technology, or fintech, companies in the industry likely will drive strategically focused M&A activity, the report said. Companies have taken different paths, including partnering with affiliated distribution channels, incubating fintech insurance startups through seed investments or acquiring fintech insurance-focused companies.

In addition to Japanese companies entering the U.S. marketplace to increase their diversification, China-based enterprises now are beginning to invest in financial services and real estate. A.M. Best views some of these newer entrants as likely facing high regulatory barriers, particularly if M&A shifts toward China state-owned enterprises as potential buyers.

The industry is still in the early stages of addressing the need to modernize marketing and distribution systems in an increasingly sophisticated technological economy. A.M. Best expects that strategic M&A with a focus on distribution and technology will be an important and recurring theme over the next several years.

© 2017 RIJ Publishing LLC. All rights reserved.

The View from Costa Rica

If people could travel backwards in time by traveling a long distance on earth, a lot more Americans would certainly retire abroad. But time travel, like Shangri-La and Ponce de Leon’s Fountain of Youth, exists only in fiction. That may explain why so many people who do retire abroad eventually return to the U.S.   

Next week I’ll travel to Costa Rica, the balmy Central American republic. Geographically, it lies between Nicaragua in the north and Panama to the south. Economically, it lies somewhere between the first and third worlds. Its beaches, rain forests, waterfalls and volcanic peaks make it a magnet for millions of tourists and quite a few retirees.

Retirement Income Journal will appear in your email inbox as usual. But it will originate in San Jose, Costa Rica, where I’ve booked an Airbnb and arranged interviews with economists, bankers, and pension administrators. My goals over the next several weeks are:

  • To learn more about the various retirement savings programs in Costa Rica. These include a basic pension, a mandatory defined contribution plan, and an assortment of voluntary or occupational pensions. I plan to compare-and-contrast their system with ours. 
  • To talk to Costa Ricans themselves about their own experiences in retirement. Like people in other countries, Costa Rica’s population (about 4.5 million) is aging and its ratio of retirees to active workers is rising. Like many American workers, many Costa Ricans aren’t covered by a workplace retirement savings plan. Many of its DB pensions are underfunded.
  • To engage with the expatriate population and answer the questions: Is retiring to Costa Rica a practical alternative for Americans who are looking for a) a warm, relaxed place to enhance their longevity and/or b) the prospect of a better standard of living than their savings can provide in the U.S.?

In the near future—or maybe as soon as the next few months—the U.S. may enter another painful and divisive round of debate about the finances of our Social Security system. During the last round, in 2004, the debate ended in a stalemate between those who wanted to cut benefits and those who wanted to raise taxes.

After the next round of debate on Social Security, action is more likely, if only because the Republicans will control the legislative and executive branches of government for at least two years. (Action on retirement issues might be crowded out by health care reform and tax reform, however.) In any case, I hope that the outcome is driven by common sense and not by ideology.

At times like this, our belief in (North) American exceptionalism can prevent us from inquiring into and learning from the successes or mistakes of other nations. But inquiry and education is on my agenda in Costa Rica. I hope to gather a few facts that might help me and RIJ readers understand our domestic retirement financing dilemma more clearly.     

© 2017 RIJ Publishing LLC. All rights reserved.  

NextCapital to provide robo-advice to John Hancock plans

NextCapital, a digital advice provider, will partner with John Hancock Retirement Plan Services to expand automated retirement advice across its 401(k) and IRA rollover businesses, the two firms announced this week.

Features of John Hancock’s NextCapital platform include: 

  • Customized user experience and ongoing engagement
  • Proprietary and third-party investment methodologies
  • Self-service and advisor-assisted service models
  • Multi-channel supporting 401(k), IRA, and retail brokerage accounts
  • Integrations with 401(k) recordkeeping systems and retail custodians

NextCapital and John Hancock said they will roll out the new digital advice solution across the John Hancock Retirement Plan Services business in phases over the coming 12 months.

As of Sept. 30, 2016, John Hancock Retirement Plan Services serviced more than 57,000 plans with more than 2.7 million participants and over $144 billion in AUMA.

© 2017 RIJ Publishing LLC. All rights reserved.

Vanguard establishes behavioral research center

Vanguard, the giant mutual fund and retirement plan provider, has established a Center for Investor Research (CIR) that it describes as “an enhancement of the company’s efforts to drive investor success through behavioral research and experimentation.”

“CIR will examine how investors make decisions through observational studies based on Vanguard’s administrative data and the growing pool of digital interactions,” the Malvern, PA-based firm said in a release. “The Center will also design experimental interventions—or “nudges”—to directly improve investor outcomes.”

“The Center will take a data-driven, scientific view of investor behavior, and transform this knowledge into practical application,” said Steve Utkus, principal and head of the Center for Investor Research, in a statement.  

CIR is an evolution of the Vanguard Center for Retirement Research, which since 2001 has conducted assessments of defined contribution (DC) plan participant behavior and retirement plan design. The CIR publishes How America Saves, an annual review of participant activity in Vanguard-administered plans. 

© 2017 RIJ Publishing LLC. All rights reserved.

America’s 20 best online stockbrokers and robo-advisors: NerdWallet

NerdWallet, the website service that helps people find the right credit card, has recognized the following 20 investment firms for outstanding stock trading and/or robo-advisor services and included them in its second annual “Best-of Awards Program”:

Best Brokers for Stock Trading:

  • Best Online Brokers: OptionsHouse and TD Ameritrade
  • Best for Beginners: Charles Schwab and TD Ameritrade
  • Best Investment Selection: optionsXpress (Charles Schwab) and E-Trade
  • Best Research: Fidelity and Merrill Edge
  • Best Low Cost Broker: TradeKing and Interactive Brokers

Best Robo-Advisors:

  • Best Online Advisors: Wealthfront and Betterment
  • Best 401(k) Advisor: FutureAdvisor and Blooom
  • Best Access to Financial Advisors: Personal Capital and Vanguard Personal Advisor Services
  • Best for Free Management: Schwab Intelligent Portfolios and WiseBanyan
  • Best for Taxable Accounts: Wealthfront and Personal Capital
  • Best for IRA Management: Betterment and Fidelity Go

© 2017 RIJ Publishing LLC. All rights reserved.

RetirePreneur: Dream Forward

Chat windows have been taking their performance-enhancing Watson pills, and they’ve spawned a new generation of fast-learning “chatbots.”

Text-based virtual assistants are poised to play a big role in the further automation of the retirement plan participant communication and education experience. These bots can be annoying, especially when they appear unbidden. But they’re much cheaper than human phone reps, capable of “machine learning” and programmable never to violate ERISA regulations.

Grant Easterbrook wants to use them to reduce the cost of 401(k) advice. The twenty-something CEO of Dream Forward, a 10-person venture-backed startup, is marketing low-cost bundled 401(k) plans in the small-plan market. Proprietary artificial intelligence (AI) bots that can “coach” participants into better savings habits are the core competency of his firm.

Dream Forward will outsource other 401(k) chores to strategic partners. Recordkeeping tasks will be handled by software from Schwab Retirement Technologies. Barnum Financial Group, part of MSI Financial Services, Inc., (the former MetLife Securities, Inc., and now part of MassMutual) provides the human financial advice as needed. Expand Financial is the third-party investment fiduciary and MidAtlantic Capital Group is the custodian.

Like other next-gen chatbots, Dream Forward’s chatbot will be active. Through coding and trial-and-error, it can steadily “learn” about individual participants from their online financial activity and initiate an interaction via smartphone or computer. That’s the “artificial intelligence” or “machine learning” part of it. Chatbots are related to iPhone’s Siri and Amazon’s Alexa—but with communication based on textual analysis instead of voice analysis. Grant Easterbrook 

As Easterbrook (right) put it, our “401(k) product includes an AI technology that is designed to address the questions, concerns, or excuses that keep employees from saving enough money for retirement, such as ‘I’ll save more when I’m older,’ or ‘I’ll get serious about retirement after my kids graduate.’ Our technology provides instant help to keep employees on track and saving enough for retirement. The Barnum professionals will bring a human face and perspective to the process.”

Chatbots inspired a wave of excited chatter in tech blogs and venture cap circles beginning last April, after Facebook invited developers worldwide to develop chatbots for its new Messenger Platform. These interruptive droids send screen messages when they sense your presence through your computer or smartphone. When tied to big data, they’re capable of knowing your identity, shopping history, preferences and tastes. If your phone is turned on, they have the potential to anticipate what you might need or desire at any moment. 

Cleverly intrusive, chatbots can insinuate themselves into your field of vision like Microsoft Word’s bygone (and much-hated) virtual assistant, Clippy. But, for firms facing cost pressure who want to reduce the headcount of their call centers, they could be a competitive necessity. “Chatbots will cause a near-term disruption in how businesses interact with consumers, and a long-term paradigm shift in how people will interact with machines,” wrote a technology writer in an article at VentureBeat.com article last spring.

Though perhaps hyped a bit by investors, the market for virtual assistants is expected to be huge. According to a report published last August and offered on the website, chatbots.org, “the global intelligent virtual assistant market is projected to expand at a remarkable CAGR (compound annual growth rate) of 32.8% from 2016 to 2024. The opportunity in the market was pegged at $627.7 million in 2015 and is expected to be worth $7.9 billion by 2024.”

Front-row seat on the future

Easterbrook is bringing this loquacious technology to the small-plan 401(k) world. The son of noted journalist Gregg Easterbrook, he graduated from Bowdoin College in 2011 with a degree in international relations then spent the next several years at Corporate Insight, the research firm that gathers competitive intelligence by maintaining accounts at hundreds of financial firms in order to lurk online as a kind of mystery shopper.

As a fintech analyst there, Easterbrook watched the robo revolution unfold. “I spent four or five years talking to robo-advice company founders, and I saw which ones succeeded or failed and what did and didn’t work,” Easterbrook told RIJ. “Robo is great but it can’t replicate the coaching and handholding that live advisors provide. We didn’t have an Aha! moment. It was more of a gradual coalescing around what the gap in the industry was. We’re the first to build AI in the area of replicating financial coaching.”

Networking with fellow Bowdoin graduates and others, Easterbrook started assembling a virtual bundled 401(k) provider. “I’m not a programmer. I’m the CEO. I provide the vision, the sales and marketing,” he said. One of his financial backers is Newark Venture Partners, a New Jersey firm that invests up to $1 million each in “seed and Series A” companies. NVP receives funding from Audible (an Amazon company), Dun & Bradstreet, Prudential Financial and other backers. He also got money from VC Fintech Accelerator, a unit of FIS Global that sponsors bootcamps for fintech entrepreneurs and provides seed capital for a select few.

“Our 401(k) plan includes an independent 3(38) advisor,” Easterbrook said in an interview, referring to the section of the ERISA statute that defines trusted pension investment managers. “And we’ve got the compliance expertise behind the scenes since we’re built on top of an existing recordkeeper.

“We don’t generally disclose our recordkeeping partners, but I will say we’re built off SRT—Schwab Retirement Technology. Our business model is that we charge an AUM fee. We charge 65-75 basis points to employee, which is less than half the cost that small plan participants would ordinarily play. We’re not reinventing the wheel. It’s a bundled 401(k) plan,” he added.

About ‘AI,’ aka machine learning

Easterbrook and his team have jumped on a trend that recently fielded its own journal—Chatbotsmagazine.com. According to the blog’s creator, Matt Schlicht, “A chatbot is a service, powered by rules and sometimes artificial intelligence, that you interact with via a chat interface. The service could be any number of things, ranging from functional to fun, and it could live in any major chat product (Facebook Messenger, Slack, Telegram, Text Messages, etc.)”

On his blog, Schlicht describes how a retail chatbot might work. If you’re buying shoes online, for instance, you might go to a retail website, find shoes you like, click and pay. In the future, a chatbot will greet you, ask intelligent questions, make suggestions and close the deal.  

dream forward logoIn the banking realm, a sophisticated new generation of chatbot apps has already arrived. In October, Bank of America introduced “Erica” (as in Am-Erica), a chatbot that according to CNBC “will use artificial intelligence, predictive analytics and cognitive messaging to help customers make payments, check balances, save money and pay down debt. She will also direct people to look up their FICO score and check out educational videos.”

As one tech consultant recently observed, “These new technologies now let banks reduce friction and provide a higher level of engagement at far lower operating cost.” Easterbrook envisions similar benefits in the world of participant engagement in the process of saving for retirement.

“Let’s say you lowered the amount of your contribution to your 401(k) account,” Easterbrook told RIJ. “You’d get a pop-message on your desktop that said, ‘What’s on your mind?’ If you say, ‘I can wait until I’m older to start saving for retirement,’ then AI will try to coach you through that.” When the chatbot reaches the limits of its capability, it will pass the participant on to a human advisor.

Easterbrook talks about an “AI-driven experience.” “The notion of ‘artificial intelligence’ is somewhat misleading. The AI function won’t be able to tell you the meaning of life, but it will recreate the experience of talking to a human being,” he said.  

“Artificial intelligence is the next stage of robo-advice. A lot of the media coverage of AI has been pessimistic, like the coverage of self-driving cars. Dream Forward is a positive application of AI. It makes the human advisor better at his or her job. We’re not trying to mislead people; we’re trying to help them out when they’re about to make a bad choice. It’s not, ‘Hi, I’m Sara Smith.’ It’s not phone tree technology—that’s a separate issue. It’s just someone trying to answer your questions in plain English.”

But don’t FAQs webpages do that already? “FAQs don’t deal with the emotional aspect of the questions. Part of our vision is that we work with human advisors. They always have a role. When you think about how financial advisors currently work with 401(k) plans, they go onsite and hold seminars, but most people never show up at the seminar. With our system, we can tell the advisors what’s going on with the participants. We can say, ‘Forty people aren’t saving at all, and ten aren’t saving for college,’ etc. We have the technology to intervene, and the advisors go in to finish the job.”

Easterbrook has no immediate plans to take Dream Financial public or to be acquired by a large asset manager or insurer, as several other fintech and robo-advice companies have been. “We’re not building for acquisition,” he told RIJ. “We see a huge opportunity to be part of a next-gen solution that everyone uses. If you’re thinking, ‘Let’s just get to a certain point and then someone will buy us,’ then you’re making wishful decisions instead of rational business decisions. That leads to bad choices.”

© 2017 RIJ Publishing LLC. All rights reserved.

Tilting at windmills

Many pension funds and other institutional investors have increased their investments in infrastructure over the last few years, seeing the long-term fixed cash flows from utility contracts as bond-like investments that have the potential to yield more than bonds themselves currently do.  

But concerns about the security of the return guarantees, particularly where unpredictable regulatory bodies are involved, have fueled some caution about investing in this asset class. A Danish pension fund’s co-venture with a German energy firm in Texas wind farms appears to be a case in point.

Papalote, a joint venture between Danish labor-market pension fund PensionDanmark and Germany’s E.ON, has filed suit in the US seeking to recover about $300 million (€284m) in alleged losses stemming from a US water authority’s decision to stop buying power from it.  

IPE.com reported this week that in October 2012 PensionDanmark bought a half share in two Texas wind farms from E.ON. They were Papalote Creek I and Papalote Creek II, a 180-megawatt facility and 200-megawatt wind farm, respectively. The Danish pension fund also bought a 50% stake in a 53-megawatt farm in Stony Creek, Pa., from E.ON.

But when wholesale energy prices in Texas dropped to less than $25 per megawatt hour last year, the Lower Colorado River Authority (LCRA) decided last year to cancel the remainder of the 18-year agreement to buy power from Papalote for $64.75 per megawatt hour, according to a report in Responsible Investor (RI).

PensionDanmark and E.ON declined to comment.   

According to the RI report, the LCRA said the cancellation was allowed under the contract and that the agreed-upon penalty for early termination was $60 million (or $60 million in liquidated damages over time). Papalote claims that it is owed more than $300 million in losses arising from the cancellation, arguing that the cancellation clause applied only in the construction phase of the project.

© 2017 RIJ Publishing LLC. All rights reserved.

‘Yours Sincerely, Wasting Away’

Sky-high projections of retirees’ out-of-pocket medical costs have forced me to consider several preventative options: Vegetarianism, specialized hip-joint exercises, severely restricted sugar and alcohol intake, and even—when Churchill’s “black dog” is on me—assisted suicide. If I stay healthy, or if I’m not alive, maybe I can beat the high cost of health care in retirement.  

Those projections—you’ve probably seen them—suggest that my wife and I are going to need to save an extra half-million dollars, on top of our current eke-by savings, just to cover medical costs after we retire. And if the incoming Republican administration decides to apply a free-market remedy to rising Medicare costs—perhaps by putting managed care companies entirely in charge—then private medical costs could be higher (while taxes on the wealthy might be lower).

My research for today’s RIJ cover story on Medicare (see “When You’re 64”) supplemental insurance led me to believe that a middle-class couple over age 65 might be able to cap their household’s ongoing retirement medical expenses at roughly the cost of premia, about $7,200 per year in current dollars, plus costs for sporadic dental, vision and hearing care.

That estimate comes from adding monthly Medicare Part B costs ($109 per person), “Medigap” insurance costs ($150 per person), and prescription drug plan costs ($50 per person). I have no idea what the incidental costs might be—periodontal care, for instance, might cost a bundle—because I don’t currently pay them out of pocket. I’m also not counting potential costs associated with assisted living expenses or long-term care, perhaps because neither my late parents nor my in-laws ever incurred them. (I’m also ignoring the costs of organic foods, which we now buy as a hedge against senescence.)

From what I read, however, my estimates are wishfully low. On the other hand, an advisor and actuary told me that there’s not much reason to worry any more than usual.

Credible sources—Fidelity, the Employee Benefits Research Institute, Ron Mastrogiovanni’s Healthview Services—that many retirees will need much more money in retirement than they expected because of the risk of extreme longevity, Alzheimer’s disease, and the ever-growing costs of medical care. Here are examples of what they’ve said on the subject:

  • “For a married couple both with drug expenses at the 90th percentile throughout retirement who want a 90% chance of having enough money saved for health care expenses in retirement by age 65, targeted savings increased from $326,000 in 2014 to $392,000 in 2015,” according to EBRI.
  • “If you’re not factoring health care costs into your retirement savings strategy, you could be setting yourself up for a nasty financial shock. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $260,000 (in today’s dollars) to cover medical expenses throughout retirement, up from $245,000 in 2015… That applies only to retirees with traditional Medicare insurance coverage, and does not include costs associated with nursing home care. Fidelity estimates that a 65-year-old couple would need an additional $130,000 to insure against long-term care expenses.”
  • “HealthView’s data shows the magnitude of the financial challenges women will face during retirement. Average expected health care costs (for Medicare B, D, and a supplemental insurance policy) for a healthy 65-year-old women retiring this year (living to age 89) are projected to be $235,526 ($153,079 in today’s dollars). A man of the same age (living to age 87) will need $199,946 ($135,321). Adding all out-of-pockets, dental, and vision increases a woman’s health care outlays to $306,426 ($199,951) compared to $260,422 ($176,769) for men.”

I’m in denial about all this, probably because of my personal experiences. My mother died suddenly of a pulmonary embolism. My father and father-in-law died at home in their respective bathrooms—probably while looking for an emergency aspirin tablet. My mother-in-law was ill for nine months before she died, but was cared for at home by her daughter, a niece and a part-time nurse.

To get objective opinions about health care costs in retirement, I asked a couple of retirement experts what they’ve seen. Their answers were somewhat reassuring.  

“I work with retirees. None have experienced the catastrophic costs I see referenced everywhere,” said Dana Anspach, a financial advisor and CEO at Sensible Money LLC in Scottsdale, Arizona. “Often I frame it this way to them: Right now most of us are paying $10,000 a year in total medical when you add up premiums, out-of-pocket costs, dental, etc. Just extend that existing cost into retirement over 25 years with a mild inflation rate and you have over a $300,000 “bill”. But to me framing it that way is a scare tactic. It’s an extension of what you’re already paying.

“I’d love to see a study of real retirees from age 65 to 85, broken into income sectors—low, medium and high—and what they are actually paying,” she added. “Much like the work that [Morningstar’s David] Blanchett has done on how inflation impacts retirees of different income levels in different ways, it would be interesting to see how health care costs impact different sectors, and how much “cost” is alternative care that the higher-income retirees choose to spend on, versus basics that the lower-income retirees will pay.”

Anna Rappaport, an actuarial consultant and chair of the Society of Actuary’s Committee on Post-Retirement Needs and Risks, agreed with Anspach. “Most people [I’ve known] with Medicare and supplements paid premiums but did not face large, acute, uncovered medical bills,” she said. “They did face unexpected dental bills and some had uncovered items. While insurance covered acute medical costs, long-term care was very different, and a few people had huge long term care costs.”

So, sure, bad stuff happens. It’s not uncommon to hear medico-financial horror stories from friends and relatives. For instance, both parents of one of my friends required long-term care for Alzheimer’s disease simultaneously. Another friend had to deplete his liquid assets in a hurry to allow his dementia-suffering spouse to qualify for Medicaid-paid nursing home care.

In another case, an 88-year-old woman chose hospice, and died two days later, rather than allow the ongoing costs of dialysis to consume all her remaining assets and deprive her children of an inheritance. Experiences vary widely, as they always do. Averages are always misleading. Ultimately, I’m fatalistic about the high cost of getting old. The elderly and their families will pay no more than they are willing and able to pay, and no amount of money or insurance can stop the inevitable.      

© 2016 RIJ Publishing LLC. All rights reserved. 

Goodbye “Obamania.” Hello, er, “Trumpelstiltskin”?

“Trumponomics” and “Trumpflation” were on Investopedia’s list of the ten Top Financial Terms for 2016, the online financial dictionary announced this week. “Trump’s legacy is yet to be determined but his impact on investing and economic policy is unmistakable,” said Caleb Silver, editor in chief at Investopedia, in a release. The website’s “Top 10 Terms of 2016,” in reverse order of popularity as search requests, included:

Calexit. Echoing the words “Grexit” and “Brexit,” a group called “Yes California” created this term to rally support for California’s secession from the U.S. The group plans a 2018 ballot initiative that, if passed, would call for an independence referendum the following year. 

NAFTA. The term “The North American Free Trade Agreement” (NAFTA) tripled in popularity after the election, when it became a symbol of harmful globalization and weak U.S. trade policy. NAFTA, which eased trade barriers between the U.S., Canada, and Mexico, was signed by president Bill Clinton in December 1993.

Trumpflation. Since Trump’s election on November 8, markets began forecasting higher inflation. After the yield on 10-year U.S. Treasury bonds spiked in December, the Federal Reserve described said the risk of inflation in 2017 is “considerable.”  

Black Swan. This term, popularized by author Nassim Nicholas Taleb, refers to unforeseen financial catastrophes. In the wake of the United Kingdom’s vote to leave the European Union (Brexit) and the election of Donald Trump, searches for this term rose over six times in popularity.

Interest rates. Rates may be low but the popularity of the term has reached an all-time high on Investopedia. In an attempt to nurse the U.S. economy back to pre-crisis health, the Federal Reserve has kept the Fed Funds rates near zero, though they raised rates a quarter point in December and have planned three more hikes for 2017.

Fintech. Venture capital and private equity continues to fee the hungry financial technology industry. Often conflated with the lending, fintech is revolutionizing banking, payments, insurance, customer service and advice.   

Peer-to-peer lending. “P2P” lending allows individuals to borrow and lend money without a bank.The Lending Club scandal brought peer-to-peer lending into the spotlight this year, and the number of searches for this term have doubled since 2015.

Dodd-Frank Regulatory Reform Bill. Trump promised to “dismantle” the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which the Obama administration in response to the financial crisis of 2008. Trump may encounter some substantial political barriers to rolling back the law.

Blockchain. The hype around blockchain skyrocketed in 2016. Blockchain has been popular with apps like Venmo and other mobile banking startups, but now traditional financial institutions are exploring this new technology for interacting with customers, suppliers and competitors. Blockchain is now a “top 50” term on Investopedia. 

Trumponomics. This is, in effect, a synonym for how to “Make America Great Again” in a Trump administration. The term refers to the economic policies such as cutting personal and corporate taxes, restructuring U.S. trade deals and introducing large fiscal stimuli in  infrastructure and defense.

© 2017 RIJ Publishing LLC. All rights reserved.

When You’re 64

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.   

© 2016 RIJ Publishing LLC. All rights reserved. 

Trump’s Tax Plan and the Dollar

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.

© 2017 Project Syndicate.

“Hipsters, lend us your ears,” says Betterment

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.

© 2017 RIJ Publishing LLC. All rights reserved.

Economies of scale allow Vanguard to further reduce fund fees

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.

© 2017 RIJ Publishing LLC. All rights reserved.

Bull market raises red flag: TrimTabs

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.”

© 2017 RIJ Publishing LLC. All rights reserved.

Quote of the Week/Honorable Mention

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.

© 2017 RIJ Publishing LLC. All rights reserved.

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

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.)Monthly Net Flows 2016

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.

© 2016 Morningstar Inc.

Xmas Cheer: The Debt Is Not Our Biggest Problem

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.Mick Mulvaney

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.

Alexander HamiltonThe 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.Robert Heilbroner

“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.

Randall Wray“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.

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