Regulations/Legal ,
In Search of Plan C
WASHINGTON, D.C.—Yesterday was Groundhog Day, the day that supposedly repeats itself ad infinitum, so it was fitting to hear assistant Secretary of Labor Phyllis C. Borzi say something that has been said many times before: that America has a retirement income problem.
“We have a crisis of confidence regarding retirement,” the Obama appointee and employee benefits expert said. She spoke at a half-day conference sponsored by the National Institute of Retirement Security, an advocacy group created by state and local defined benefit plan administrators about three years ago.
“Defined contribution plans used to be our Plan B, after defined benefit plans,” she continued. “But the past two years have shown that DC plans weren't a silver bullet. We don't appear to have a Plan C, other than Social Security. Our job is to come up with a Plan C.”
Borzi, who runs the DoL's Employee Benefits Security Administration, has jurisdiction over some 700,000 private-sector retirement plans and 2.5 million health plans. She was the featured speaker at the NIRS event, which was called “Raising the Bar: Policy Solutions for Improving Retirement Security.”
The event drew a capacity crowd of some 250 people, most of whom work in public pensions, which are under siege because the recession has made it hard for states and taxpayers to fund them. The crowd came to hear speakers like Putnam Investments' CEO Robert Reynolds, Harvard Law professor Elizabeth Warren, AFL-CIO president Richard L. Trumka and Roger W. Ferguson Jr., the president and CEO of TIAA-CREF.
Nothing startlingly new was revealed at the conference, which was held in the ornate Columbus Club, a one-time “fancy soda fountain” whose walls and ceiling now feature hand-painted Pompeian flowers, inside Washington, D.C.'s restored Union Station. But the event suggested that the issue of retirement income is gaining traction in the nation's capitol.
Borzi's presence, and the fact that the Labor and Treasury Departments also chose yesterday to publish a request for 90 days of public input about workplace annuities, seemed to signal that the Obama Administration has officially picked up the retirement income torch.
Compared with retirement income conferences sponsored by the financial industry, this one was distinctly more liberal in tone and sentiment. It reflected the world-view in which government officials are problem-solvers, unions are forces of good, and the welfare of the embattled middle class, rather than the most affluent quintile, take priority.
Nonetheless, Borzi, an attorney who had a reputation as a “fiduciary hawk” during her career as an academic and an ERISA lawyer, didn't seem to underestimate the challenges her department faces in trying to put lifetime income options in retirement plans.
Borzi ticked off the many “technical and policy” issues that make it difficult to introduce lifetime income options into retirement plans, including questions about spousal consent, around the conversion rates for projecting a plan participant's future income, or about public's stubborn resistance to annuitization even when it is offered.
She made a point of saying that reform would not come at the expense of strong oversight. “Some academics say that, if we waived the fiduciary rules, plan sponsors would offer annuities in their plans. I can assure you that the fiduciary rules won't be waived on my watch or on [Labor Secretary] Hilda Solis' watch, but we want to find out how we can make it easier,” she said.
“Labor and Treasury are now looking at a lost feature of DB plans: the lifetime income stream. I use the phrase ‘lifetime income stream’ because I'm not hawking annuities. I don't work for the insurance companies,” she was quick to point out, perhaps in recognition of the competition between the securities and insurance industries in the retirement market.
“But something has gone wrong, and we need to look for a means or a mechanism for people to enjoy retirement without fear,” she continued. “The 401(k) plan isn't really a retirement system. You get money out when you change jobs. People either squander their lump sum payouts, or they treat it too conservatively because they're afraid of outliving their money.”
In putting out a request for information, or RIF, yesterday, Borzi said, “We want to start a national dialogue or conversation to see if it's a good idea to allow people to take a lifetime income stream” from 401(k) plans. “We want to find out if there are things we can do—products, regulations, legislation—or if we need to do anything at all.”
After the 90-day comment period, “We might have hearings. We might propose legislation. The administration is very interested in retirement security, so there may be administration initiatives,” she said, noting mordantly, “If you don't know where you are going, any road will take you there.”
© 2010 RIJ Publishing. All rights reserved.
Marketing/Advertising,
The Strongest Financial Brands Are…
Who has the strongest brands in the financial industry? According to the Cogent Research Investor Brandscape 2010 survey of affluent investors, the leading names are mostly household names: TIAA-CREF, Vanguard, Fidelity, Schwab, John Hancock, MetLife, The Hartford and American Funds (though not necessarily in that order).
But first place doesn't necessarily mean great. Cogent's survey showed low investor confidence in the financial services industry overall. Less than 40% of affluent investors polled were confident in their mutual fund provider, fund distributor or financial advisor.
| Fund Company | Rank | ||
|---|---|---|---|
| 2009 | 2008 | 2006 | |
| Vanguard | 1 | 2 | 1 |
| Fidelity Investments | 2 | 1 | 2 |
| American Funds | 3 | 3 | 3 |
| T. Rowe Price | 4 | 4 | 6 |
| TIAA-CREF | 5 | N/A | N/A |
| Franklin Templeton | 6 | 7 | 19 |
| Fidelity Advisor Funds | 7 | 6 | 11 |
| Oakmark | 8 | 29 | 31 |
| Morgan Stanley Inv. Advisors Funds | 9 | 8 | 9 |
| Schwab/LaudusFunds | 10 | 5 | 5 |
Among 39 mutual fund providers considered, the three highest-rated brands were Vanguard, Fidelity and American Funds. Franklin Templeton rose to 6th in 2009 from 19th in 2006, and Oakmark vaulted to 8th last year from 31st in 2006.
The three highest-ranked brands among 20 fund distributors were Charles Schwab, Fidelity and Morgan Stanley Smith Barney. Edward Jones jumped from 14th place in 2006 to fourth in 2009.
Among six exchange-traded fund (ETF) providers considered, Vanguard was ranked highest in all performance criteria. Among 14 variable annuity issuers, TIAA-CREF earned the highest level of customer loyalty, followed by Ameriprise Financial and Allianz Life. (See RIJ's Data Connection for top 10 VA issuers).
Risk-aversion rises
Aside from canvassing investors about specific providers of mutual funds, variable annuities and other products, the survey also registered trends in the risk appetite and financial product purchasing preferences among affluent investors, who represent only about 17.5% of U.S. households.
| Distributor | Rank | ||
|---|---|---|---|
| 2009 | 2008 | 2006 | |
| Charles Schwab | 1 | 2 | 3 |
| Fidelity Investments | 2 | 1 | 4 |
| Morgan Stanley Smith Barney | 3 | N/A | N/A |
| Edward Jones | 4 | 8 | 14 |
| Merrill Lynch | 5 | 4 | 1 |
| Raymond James | 6 | 5 | 10 |
| UBS | 7 | 9 | 2 |
| Vanguard | 8 | 6 | 6 |
| Wells Fargo Advisors/Wachovia Securities | 9 | N/A | N/A |
| Ameriprise | 10 | 11 | 12 |
Ownership of annuities has risen four percentage points, to 34%, and allocation of assets to annuities rose 3.6 points, to 9.65% since 2006 years, the survey showed. Fixed annuities showed stronger increases than variable. Ownership of fixed indexed annuities remained at 6% of those surveyed.
“Interest in annuities is also on the rise across all age and wealth segments, particularly Silent Generation investors,” the report said. (The survey did not differentiate between deferred and immediate annuities.)
Among variable annuity issuers, all but TIAA-CREF “have more detractors than promoters” and “few VA brands achieve both high awareness and favorability, and firms that are less well known earn the highest impression ratings,” the survey showed. In 2009, loyalty toward VA providers was higher than in 2008, however.
These days, even the comfortable are worried, apparently. The authors of the report were struck by the growing risk-aversion of those surveyed, who had a mean asset level, excluding real estate, of $740,000.
This was true even for those between ages 28 and 44. “Gen-X has a similar risk profile to the Silent Generation, and we wonder if that mind-set will remain consistent,” said Tony Ferreira, managing director at Cogent Research.
“Even if they're only 40 or 41 years old, they're transitioning to lower risk tolerance products. And more are saying, ‘I want income but also some guarantees,’” he added. “We wonder if they have they been burnt so much in last ten years that they may never become more aggressive. That group is most likely to think they won't get Social Security or that they'll get reduced benefits or that they may have to wait longer or pay higher taxes on benefits.”
| Attitudes of Affluent Investors |
|---|
Source: Cogent Research Investor Brandscape, 2010. |
Ownership of mutual funds and participation rates in qualified plans are both down among affluent investors over the past three years, the report shows. Mutual fund ownership dropped to 78% in 2009 from 94% in 2006, a decline of 17%. Among fund owners, allocation to mutual funds has fallen to 44% from 53% since 2006.
Meredith Lloyd Rice, the project director of the Investor Brandscape study, pointed to several factors driving those trends: a shift to self-employment following last year's widespread layoffs, migration to certificates of deposits and fixed annuities, and asset decumulation by those out of work or already retired.
Indeed, the Urban Institute reported this week that 8.2% of men between ages 55 and 64 are out of work and have been looking for work—up from only 2.7% in November 2007. About 1.3 million 62-year-olds claimed Social Security in 2009, a record number, partly because of the many 62-year-olds and partly because of unemployment.
© 2010 RIJ Publishing. All rights reserved.
Company/Trade Group News,
New York Life Introduces ‘Lifetime Wealth Strategies’
Last summer, New York Life rolled out a new managed account solution that enabled its own agents and brokers to blend investments and insurance in a single portfolio, whose weightings would shift from stocks and life insurance to bonds and annuities over a client's lifetime.
“We launched it in the agency in the second half of last year. There's been a lot of excitement around it,” said Michael Gordon, first vice president in New York Life's U.S. life insurance and agency business, who has led the effort so far. “And we're seeing sales that are consistent with expectations.”
Now the firm, the world's largest mutual life insurer, plans to offer that solution to third-party distributors. The first version, called Lifetime Wealth Strategies, is designed for registered reps. A tweaked version, intended for fee-based advisors, is contemplated. The third-party partners haven't been named yet.
The new platform is significant on several levels. It's the latest of several insurance industry attempts—not all of them successful—to market retirement income processes instead of just products, in a variation of the old give-them-the-razors-and-sell-them-the-blades strategy. And it's the first to integrate both life insurance and annuities into investment portfolios.
Lifetime Wealth Strategies also represents major a push by the country's leading income annuity seller, and one of the healthiest insurance companies in the post-crisis world, to solve the “annuity puzzle” and convince the masses—or at least the mass-affluent—to embrace income annuities.
“Our goal is not to have a 25% of the [SPIA] market,” Gordon said, referring to the fact that, with $1.4 billion in SPIA sales through the first three quarters of 2009, New York Life alone has a quarter of the U.S. SPIA market. “Our goal is to have a smaller share of a much bigger market.”
Partnering with Ibbotson
The financial engineering that drives the program also has a noteworthy pedigree. The underlying formulas, which New York Life calls the “Protection Solution Decision Model,” as well as the client assessment questionnaire, were created through a partnership with Ibbotson Associates, the asset allocation specialty firm owned by Morningstar, Inc.
| Guiding Principles of Lifetime Wealth Strategies |
|---|
|
Laurence B. Siegel, the CFA Institute research director who invited Milevsky and the Ibbotson team to write that monograph, says they answered an important question: “How can people save for retirement in DC world where you have no obvious efficient market in the annuitization part of the solution.”
“You can't hold the index that you care about most—an index of your consumption,” Siegel told RIJ. “You sort-of can with a laddered portfolio of TIPs, but then you don't get any mortality pooling. Only an insurance company can do this, and the fact that New York Life is doing it is very reassuring. This really has a chance to change the way money is invested by individuals.”
Aside from designing the platform's gearbox, Ibbotson is also one of the asset managers. “There are four money managers, one is Morningstar Investment Services, who go for alpha. Then there's Ibbotson Investment Services. They bring an active/passive hybrid strategy that goes after alpha where alpha is feasible, but will go passive in areas where you can't beat benchmark,” Gordon said.
“Then there's Brinker Capital, which overweights to absolute return like an endowment, and Loring Ward, which partners with Dimensional Fund Advisors. They use a passive strategy. They don't believe in long bonds, and they weight to international equities instead of domestic to offset the short term bonds,” he added.
Peng Chen, president and chief investment officer at Ibbotson Associates, thinks the program will bridge the insurance/investment divide for reps and advisors.
“Most advisors are either equipped to look at asset allocation or insurance, but its trickier to put them together,” he told RIJ. “We have a framework that gives them specific recommendations, and we put the recommendations together in an easily managed cohesive package.
“We've had great traction with this on the agency side. It happens seamlessly and automatically, so that as you get into the retirement stage, you begin to see withdrawals from the life insurance portion to fund the retirement income portion,” he added.
The program matches portions of the client's money with his risks, rather than with specific time-periods. “In the typical ‘bucket methods’ in the market today, you usually see a time-segmented approach,” Chen said. “That doesn't necessarily solve the issue, however. We're bucketing not in terms of time segments, but in terms of needs.”
On the account statements, the insurance and investment assets are integrated, with insurance assets counted toward the fixed income allocation of the portfolio. “A conservative investor might be assigned an 88% fixed income and 12% equity allocation, but the fixed income might be part insurance. So the allocation could be 10% insurance, 78% fixed income and 12% equities,” Gordon said.
On a mission
Other insurance companies have launched investment/insurance platforms, with mixed success. Nationwide and Envestnet launched a time-segmented program last summer called RetireSense among Envestnet's advisors. It's still too new to assess.
A few years ago, MassMutual introduced a tool called the Retirement Management Account, which came to naught as a result of the financial crisis and internal management conflicts.
Jerry Golden, who created the Retirement Management Account, which employed staggered purchases of income annuities in a rollover IRA, says the New York Life venture is most likely to succeed if it is led by a dedicated, focused marketing team that champions the managed account concept itself, not just the products in it.
If the team is made up of competing advocates of individual products, the whole effort could founder, he said. “If product sales are easier than program sales, then they'll take the path of least resistance,” said Golden, who left MassMutual after the RMA project imploded.
Before the financial crisis, Phoenix Companies partnered with Lockwood Capital Management on a unified managed account that attached a lifetime income guarantee to an investment portfolio. But New York Life's platform eschews living benefits in favor of the company's bread and butter SPIAs, which it calls “Guaranteed Lifetime Income” to avoid the word that continues to confuse and frighten consumers.
The company has steadily nurtured those sales during the first decade of this century.
In 2003, the company's SPIA sales were only $115 million. But that year, New York Life's current CEO, Ted Mathas, called for focus groups to help make the products more consumer-friendly. The company subsequently added liquidity features to the product, such as cash withdrawal opportunities and interest rate adjustments.
Sales rose. In 2004 and 2005, the insurer's SPIA sales reached $294 million and $439 million, respectively. In 2006, New York Life won the contract to market SPIAs through AARP, and sales grew faster. In the first three-quarters of 2009 alone, New York Life SPIA sales totaled $1.4 billion, including over $600 billion each through captive distribution and third-parties, and $138 million through AARP.
The Lifetime Wealth Strategies program is expected to help maintain the momentum.
“This should massively expand the market,” Gordon said. “It's like the evolution that the securities industry went through. Buying an individual security was a big deal before mutual funds came along. The process wasn't scaled yet. You needed Modern Portfolio Theory and asset allocation and then the technological revolution to make it happen. Our idea is that something similar will happen in annuities.”
© 2010 RIJ Publishing. All rights reserved.
Industry Views,
TIPS for Retirement Investing in the ‘New Normal’
Among the lessons we've learned from the recent financial crisis is that traditional asset class diversification is not always a free lunch. Another lesson, corresponding with the close of what was essentially a lost decade for major stock indexes: Equities aren't always long-term winners.
For retirees depending on income from their investments, this education is particularly painful, going to the very heart of their ability to maintain their lifestyle. While a decline in equities may, at times in the past, have been offset by a rise in bonds, having the two assets fall fast and hard in tandem during the crisis was rough for even well-diversified retirees.
School, unfortunately, is still in session, as we head into a period which may well see lower economic growth, increased savings, more government intervention - all topped off with the eventual return of inflationary threats.
This New Normal will challenge all investors and may heighten the traditional risks that retirees face, whether from volatile markets, outliving their portfolios, or simply not having enough savings. Here's where inflation -- long under-addressed by the retirement industry - starts to look particularly virulent.
Many investors have traditionally relied on stocks and bonds to see them through retirement, based on the widely held - yet often incorrect - assumption that equities are a suitable inflation hedge. It is true that equities might perform well over many time periods, even in the New Normal. However, the volatility of equity returns could represent a substantial deviation from purchasing power when equities do not perform well versus inflation, such as the 10-year period that ended December 31, 2009, or during periods of extremely high inflation like the 1970's.
For today's retirees it's not unusual to live 20, 30, or even 40 years into retirement, complicating their ability to manage risk and deliver returns that maintain their purchasing power. Even if an investor believes that equity exposures may help keep up with inflation, such a strategy elevates the risk of irreparable portfolio damage in the face of extreme, unforeseen market events. Retirees should be spending their time enjoying their lives, not worrying about the risks of having their portfolios ravaged by market crises, of inflation cutting into their purchasing power, or both.
While financial service providers have been aggressively developing retirement income products to meet retirees' needs, traction has been limited. In recent years, managed payout funds had proliferated and grown in popularity, yet their image has been tarnished by the damage they sustained in the financial crisis due to heavy equity allocations. Insurers, meanwhile, have expanded their menu of annuities - including some that hedge for inflation - yet many retirement investors remain wary of these investments. Annuities offer a fixed rate of return, backed by the claims paying ability of the insurer, but they often have high management costs and steep penalties for withdrawals.
The need for food, healthcare and housing never ends, and portfolios aimed at providing in-retirement income should have elements that cover these costs every month, regardless of equity-market performance or whether inflation is steadily raising the costs of buying these essentials. There is little tolerance for risk in these areas.
Fortunately, there is a compelling solution designed precisely to preserve purchasing power, typically with substantially less volatility than stocks: Treasury Inflation Protected Securities, or TIPS.
TIPS offer an explicit inflation hedge. They are issued by the U.S. government, which guarantees their timely payment of interest and return of principal at maturity. Their face value is adjusted in step with changes in the rate of inflation as measured by the Consumer Price Index for All Urban Consumers (CPI-U), with interest paid on the adjusted amount. At maturity, a TIPS investor receives the original principal plus the sum of all the inflation adjustments since the bond was issued. The result is a 100% connection to inflation, guaranteed by Uncle Sam.
Whether a retiree is drawing down savings over time or living off of interest payments and dividends - and few can - we believe the explicit inflation hedge that TIPS provide can help protect purchasing power over an extended period, while their high quality and government guarantee can offer some reassurance for risk-conscious retirees.
There are risks to TIPS, but we believe many of these can be addressed by a well-designed investment process. The value of a TIPS investment can decline if real (inflation-adjusted) interest rates rise. In the event of a deflationary cycle, which is a sustained fall in prices, the U.S. government guarantees repayment of principal; at maturity, investors receive the greater of the inflation-adjusted principal or the initial par amount. Interest payments on TIPS would decrease in a deflationary environment because interest payments are always based on the inflation-adjusted principal amount, which could potentially be lower than the face value of the bond.
Also, investing in TIPS clearly isn't without its challenges, particularly for retirement investors who wish to receive a high frequency of payments (preferably monthly) to replace employment income. Most retirees require monthly income to pay for their "must haves," while TIPS interest payments are twice-yearly. Moreover, there are substantial gaps in TIPS issuance that make for an irregular schedule of maturities - up to four year gaps in some cases.
The challenge is as stark as the pain many investors have felt: Traditional approaches to building a retirement portfolio often depend on a risky asset class that does not explicitly track inflation - or ignores inflation altogether. Investors need a better way. We think TIPS, properly managed, are up to the challenge.
© 2010 PIMCO, Inc. All rights reserved.
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund's prospectus and summary prospectus, if available, which may be obtained by contacting your PIMCO representative. Please read them carefully before you invest or send money.
Past performance is not a guarantee or a reliable indicator of future results. PIMCO does not offer insurance guaranteed products or related products that combine both securities and insurance features. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. Inflation-indexed bonds issued by the U.S. Government, also known as TIPS, are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation. Repayment upon maturity of the original principal as adjusted for inflation is guaranteed by the U.S. Government. Neither the current market value of inflation-indexed bonds nor the value of shares of a fund that invests in inflation-indexed bonds is guaranteed, and either or both may fluctuate.The funds may use derivatives for hedging purposes which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. The Funds are non-diversified, which means that they may concentrate their assets in a smaller number of issuers than a diversified fund.
During periods of rising inflation the amount of the monthly distribution is expected to increase and during periods of deflation the amount of the monthly distribution is expected to decrease. The monthly distribution amount may be adjusted during the term of a Fund to better enable the Fund to provide regular monthly distributions through the final maturity date. These distributions are not guaranteed.
The value of most bond funds and fixed income securities are impacted by changes in interest rates. Bonds and bond funds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise.
The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. It is not possible to invest directly in an unmanaged index.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC. ©2010, PIMCO.
PIMCO Funds are distributed by Allianz Global Investors Distributors LLC, 840 Newport Center Drive, Newport Beach, CA 92660, (800) 927-4648.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.
Industry Views,
Firms Back Variable Annuity Product Launches With Aggressive Online Marketing Campaigns
No annuity product was hit harder during the financial crisis than variable annuities. Many variable annuity contracts saw significant drops in value, in many cases 30% or more, due to the products' heavy exposure to the financial markets. For an investment that supposedly offers a guaranteed retirement income stream, variable annuities had been exposed as flawed and ultimately risky investment vehicles.
Despite the firms' best efforts to evolve variable products to fit the new financial landscape, variable annuity sales remained flat throughout 2009 and were down significantly in contrast to 2008. In response to the lackluster sales numbers, firms have intensified their online marketing campaigns to the public, placing additional promotional muscle behind high-profile variable annuity product launches.
Fidelity and AXA Equitable have both released memorable, multi-faceted online sales campaigns for new variable annuities over the last three months. Fidelity's November launch of the MGGI (MetLife Growth and Guaranteed Income) variable annuity was backed by homepage promotional imagery that integrated the firm's flagship GPS campaign theme and linked to a comprehensive product page.
Aside from offering pertinent details about the MGGI variable annuity and a good selection of literature, the product page also features an engaging video and new product-focused calculator. The video is three minutes long and creatively highlights key product features and strengths using vivid imagery and audio commentary.
The MGGI calculator has an attractive, user-friendly interface and is easy to complete. After inputting age, lump sum investment value and market return, a hypothetical illustration displays the MGGI's target income payments. The results can be viewed in a summary, chart or table.
The AXA Equitable Retirement Cornerstones variable annuity was introduced online in creative fashion in January. A relatively straightforward homepage image links to the Introducing Retirement Cornerstone sitelet, which contains an interactive cube that highlights key product features.
The interactive Retirement Cornerstone cube focuses on four areas - Tax Deferred Single Platform, Performance, Protection and Retirement Cornerstone. Product structure, key features, available underlying accounts, performance data and account management are clearly explained. Links to the Retirement Cornerstone product information page and related literature are offered in all four sections.
Over the last year, firms have worked tirelessly to mold variable annuities into safer, more cost-efficient retirement investments that pose fewer risks to both consumers and issuers. It is clear that aggressive and engaging online marketing campaigns will play a large role in selling prospective investors on variable annuities as reliable retirement income solutions.
© 2010 Corporate Insight, Inc. All rights reserved.
Industry Views are special reports that are sponsored and independent from RIJ's editorial content.