Annuities, 401(k)/IRA, Company/Trade Group News,
Financial Engines' Secret Income Plan
Financial Engines, Inc., the provider of investment advice and managed account services to defined contribution plan participants, intends to begin offering an in-plan retirement income option to its clients starting in late 2010 or early 2011 and to offer it to as many as 4.2 million participants within three years.
Jeff Maggioncalda, CEO of the Palo Alto, Calif.-based firm, said in a recent conference call with security analysts that the “solution will be different from what’s offered today, and will address concerns that have caused employers to avoid embracing” in-plan income options so far, such as high costs and fiduciary issues.
While offering no details, Maggioncalda said the program would be an extension of the company’s Professional Management managed account services and would allow users of those services to draw a monthly income in retirement. He did not say whether a rollover IRA would be involved.
The program would not require plan sponsors “to add an annuity or change their investment lineups to offer our solution” and would “eliminate the counterparty risk associated with adding an annuity to their plan,” he said, noting that the program would work “with any open architecture combination of investment products."
Despite that disclaimer, there's reason to believe an annuity or annuity-like feature could be involved. Financial Engines offered a description of what it considered a viable in-plan income option in an eight-page written response last May 3 to the Department of Labor’s request for information regarding such plans, and a type of annuity was integral to it.
That hypothetical plan involved the purchase of longevity insurance—life-contingent deferred income annuities that can be purchased at a steep discount because they don’t pay out unless and until the contract owner reaches an advanced age, such as 80 or 85.
Longevity insurance has drawn serious attention from academics in recent years, but not from investors. PIMCO has recommended that investors combine its inflation-protected payout fund with a longevity insurance contract as a retirement income strategy. Annuity expert Moshe Milevsky of York University has written about the advantages of longevity insurance. MetLife, Hartford and Symetra offer quotes on longevity insurance, but the product is rarely purchased.
Currently, the most prominent in-plan income solution might be Prudential Retirement’s IncomeFlex program, which allows participants to add a guaranteed lifetime income benefit, like the ones offered on variable annuities, to target-date funds in a 401(k) account. Great-West also offers such an option. MetLife offers SponsorMatch, a program that allows participants to buy chunks of income far in advance of retirement with their employer match.
Financial Engines, which was co-founded in 1996 by Nobel Prize winner William Sharpe, started as a respected but fairly modest provider of online investment advice to 401(k) plan participants. Among other things, it gave participants access to a colorful Internet-based widget that enabled them to conduct their own Monte Carlo projections of hypothetical portfolio returns.
Over time, the company has come to offer Internet-mediated managed accounts to participants within 401(k) plans, and was recently identified as the largest Registered Investment Advisor in the U.S. The company reported $29.4 billion in 401(k) managed accounts as of June 30, 2010, and $300 billion in “assets under contract.” That number refers to the total assets in the 385 retirement plans whose 4.2 million participants can purchase Financial Engines’ managed account services.
In the DoL comments, Jason Scott, Ph.D., the managing director of the Retiree Research Center at Financial Engines, urged the Department of Labor to amend the tax laws to exempt assets in longevity insurance contracts from the calculation of required minimum distributions.
Though not specific, Scott's comments describe a managed “hybrid solution” in which participants would draw monthly income from a managed account early in retirement “while always maintaining sufficient assets to give participants the option of increasing the income payout through an annuity purchase.”
In addition, “The advantage of the hybrid approach is that as the insurance becomes compelling, the hybrid solution facilitates a shift from a highly liquid and flexible solution to one more focused on guaranteed lifetime income,” the comments said. Such a program sounds similar to the Retirement Management Account that MassMutual briefly marketed until the financial crisis.
Scott has written about longevity insurance for some time. In a 2009 research paper called, “What Makes a Better Annuity?” he and others suggested that the introduction of longevity insurance, because it protects the owner against longevity risk much more cheaply than immediate annuities, could greatly expand the annuity market.
In the DoL comments, Scott noted that an “allocation of 10 to 15% of wealth to a longevity annuity creates spending benefits comparable to an immediate annuity allocation of 60% or more.” The comments also recommend that any future DoL-approved qualified default income solution contain the following elements:
• Fee reversibility – In the accumulation phase, qualified default arrangements must be fully reversible at no cost for 90 days. A similar guideline should apply to retirement defaults.
• Liquidity – Some insurance products, such as an immediate annuity, exchange liquidity for additional retirement income. However, a default that involves the loss of liquidity could be a significant shock to unaware participants. To manage this concern, we recommend either an extended period where liquidity is retained or a requirement that loss of liquidity requires a proactive participant decision.
• Death benefit – Insurance that maximizes income will not pay a death benefit. However, in a default context, the lack of a death benefit could also be surprising to the heirs of DC plan participants. Similar to liquidity provisions, we recommend either an extended period where a death benefit is retained or a requirement that loss of a death benefit requires a proactive participant decision.
• Conflicts – If the retirement default is an advisory relationship that helps participants with drawdown decisions, existing rules governing prohibited transactions should extend to lifetime income services. Participants should be protected from advice that could be influenced by conflicts of interest associated with the compensation of the advisor.
• Role of Fiduciary in Selecting Default– If a retirement income solution is made a plan default, we recommend that the plan sponsor still play a fiduciary role in the selection and monitoring of any such default.
© 2010 RIJ Publishing LLC. All rights reserved.
Annuities, Marketing/Advertising, Research,
Which Are the Hottest VA Brands?
The names “Prudential” and “MetLife,” in that order, come most quickly to the minds of investment advisers and registered reps when they’re asked to name a variable annuity provider, according to the 2010 Advisor Brandscape survey from Cogent Research.
That’s not surprising. Prudential and MetLife were the top two sellers of variable annuities in the U.S. in the first quarter, according to Morningstar, with over $4 billion in sales each and a combined market share of 28.5%.
In Prudential’s case, a relentless advertising push, a well-differentiated product with rich living benefits, and an enhanced wholesale force helped make it the most recognizable name in variable annuities. The company scored well in the two biggest drivers of adviser loyalty: range of products and long-term sub-account performance.
Newark, NJ-based Prudential spent $85 million on measured media in 2009 and $18 million in the first quarter of 2010, according to Kantar Media. MetLife, the second most recognizable annuity brand, spent $56 million on consumer and business-to-business advertising in 2009, according to Nielsen.
“Prudential does have very high ad awareness,” said Meredith Lloyd Rice, senior project director for the 2010 Advisor Brandscape report, which was based on a survey of 1,560 registered advisors—independents, brokers and RIAs—last spring. Non-subscribers to the report can purchase a copy from Cogent Research. In the past, VA issuers have used the Brandscape study to find out if their scores reflect their advertising, marketing and wholesaling efforts.
“The campaign for its HD6 [variable annuity living benefit] seemed to resonate with advisors. In a regression analysis of ‘loyalty drivers,’ we found that ‘range of variable annuity product features’ was the most important loyalty driver for Prudential,” she said.
In mid-June, Prudential signed a deal for two new image-building TV ads for telecast during morning shows, network news shows, and prime time syndicated shows, along with billboard ads in 15 major markets. The company also bought home-plate signage during television broadcasts for eight Major League Baseball teams.
Cogent’s study, which also gathered advisors’ opinions about mutual funds, exchange-traded funds (ETFs), and employer-sponsored retirement plans, added to evidence that some annuity providers have thrived in the “flight to strength” since the financial crisis while others have lost momentum. Companies that maintained rich living benefits, despite the high fees involved, have fared better. Companies that bet the crisis would spark demand for simpler, less expensive riders haven't done as well.
After Prudential and MetLife, Jackson National, Lincoln Financial, Nationwide, Pacific Life, and Sun Life received the highest combined ratings for awareness and “favorable impressions” from advisors. John Hancock and the Hartford also received high brand ratings, but both have lost ground because of unpopular product design (John Hancock) or questions about financial strength (Hartford).
Last January, Sun Life purchased naming rights to the Miami Dolphins stadium, in a five-year deal worth $7.5 million. That and other promotional moves appear to be paying off. "An impressive story is building for Sun Life Financial, which holds a position a bit further back in the pack. The firm enjoys stronger consideration and favorability, but has yet to translate this momentum into a deeper sense of advisor loyalty, despite best-in-class performance on several key client experience attributes," the Cogent report said.
Overall, however, allocation of assets to variable annuities by advisors dropped 20% in 2010, compared to the previous year, as average allocations declined to 8% from 10%. Among registered investment advisors (RIAs), allocations declined to only 2% in 2010 from 6% in 2009. Among those advisors who use variable annuities, the average allocation is 12% of assets.
“A two-year uptick in the use of and allocations to variable annuities has ended and some of the products recent ‘foul weather’ friends, particularly RIAs, appear to have already returned to their previous ambivalence toward these products,” Cogent Research said. Among RIAs the average assets under management (AUM) devoted to variable annuities fell by more than half, from $28.9 million in 2009 to $13.7 million today. When RIAs do buy variable annuities, some apparently do so only to exchange a client's high-cost contract to an ultra-low-cost contract, like Jefferson National's.
Variable annuities tend to be most popular in the independent channel, where 52% of advisors use them and allocate an average of 16% of client assets to the product. Advisors who manage less than $25 million in client assets are most likely to use them in their practice. Independent advisors represent 23% of all advisor-managed assets but 44% of advisor-managed variable annuity assets.
“What emerges across all these categories is a picture of an experienced Independent planner with a smaller book of business who is comfortable with the VA story and has found a niche for them within his or her practice,” Cogent said.
Advisors are not as nervous about the financial stability of issuers as during the depth of the crisis in 2009, nor are they talking as much about “splitting tickets” among providers to diversify risk. Instead, they are “once again seeking out those providers with a performance story to tell,” while also looking for guarantees that offer security “in the post-meltdown investment environment,” the Cogent researchers said.
Advisor Brandscape showed that, for the first time, more than half (54%) of all advisors describe their compensation as “fee-based.” Because of that, Cogent said “VA providers should build solutions that are simple, low-cost, and priced to “fit” into the growing advisor asset-based platforms.” The average advisor client is 57.7 years old has about $690,000 in investable assets.
© 2010 RIJ Publishing LLC. All rights reserved.
Annuities, Research, News,
By Another Name, Annuities Would Smell Sweeter
Even though most people like the annuity concept, more than half (53%) of Americans aged 44-75 expressed distaste for the word “annuity”, according to a survey from Allianz Life Insurance Company of North America.
Some 80% of 3,200 people surveyed preferred a product with four percent return and a principal guarantee over a product with an 8% return subject to market risk—thus answering the classic behavioral finance question, Would you prefer a 100% change of $50 or a 50% chance of $100. But they balk at the word, “annuity.”
“No other financial product offers guaranteed income for life. Government, financial planners and the industry need to re-educate the American public about what these products do and how they can help secure a stable retirement,” Allianz Life said in a release.
The study, titled Reclaiming the Future: Challenging Retirement Income Perceptions, found that respondents had decades-old prejudices regarding annuities. Fifty-three percent first formed their opinion of annuities 10-20 or more years ago. Only 27% knew of innovations made with annuities during the past five to 10 years. Only 23% know that variable annuities allow contract holders to participate in market gains.
When people understand annuities, they’re very satisfied with them. According to the study, 76% of annuity owners are “very happy” with their purchase. More than half of owners like the product because it’s a safe, long-term investment vehicle (57%), a great way to supplement their retirement income (56%), and an effective tool to get tax-deferred growth potential (56%). Consumers ranked annuities second-highest (50%) in satisfaction among all financial instruments, beating mutual funds (38%), stocks (36%), U.S. savings bonds (35%) and CDs 25%).
© 2010 RIJ Publishing LLC. All rights reserved.
Research, Company/Trade Group News, News,
Fitch Deems Life Insurers “Stable”
Fitch Ratings has upgraded the outlook for the U.S. life insurance sector to stable from negative. The negative outlook was initially assigned in September 2008. A stable outlook for the sector indicates that Fitch believes a vast majority of insurer ratings will be affirmed as they are reviewed over the next 12-18 months.
A special report published today, 'U.S. Life Insurance Sector: Outlook Revised to Stable' is available at www.fitchratings.com.
Over the next 12-18 months, Fitch's primary rating concerns for life insurers include:
- Uncertainty over the economic outlook and the potential for a double-dip recession.
- Higher-than-expected losses on commercial real estate (CRE) related assets.
- Emerging interest rate risk due to historically low interest rates, which are having an impact on industry investment yields, and uncertainty regarding the direction of future interest rates.
The Stable Rating Outlook for the U.S. life insurance sector reflects the industry's improved balance sheet and operating fundamentals. Fitch notes that sustained improvements in investment valuations and financial market liquidity has resulted in a significant reduction in investment losses, and allowed the industry to raise capital and fund near-term maturities.
Fitch expects that favorable trends in industry earnings performance and investment results in 2010 will continue over the near term, but will continue to lag pre-crisis results due to the lower interest rate environment and steps taken by the industry to lower risk in the investment portfolio by reducing investment allocations away from higher risk, higher return asset classes.
Results in 2010 have benefited from improved interest margins, higher equity market valuations (relative to prior year), and the aforementioned decline in investment losses. Fitch expects the industry's large in-force variable annuity business to be a drag on profitability over the near term, and could cause a material hit to industry earnings and capital in an unexpected, but still possible, severe stress scenario.
Fitch views the passage of the Dodd-Frank bill earlier this year as credit neutral for life insurers but recognizes that uncertainties remain over the interpretation of several aspects of the bill. Primary concerns include the potential designation as a systemically important non-bank financial institution and its implications, and the uncertain impact on industry sales practices, particularly for registered products.
The outlook revision also considers the positive steps taken by a number of life companies to de-risk their product offerings, reduce reliance on institutional funding sources, and strengthen hedging and other risk mitigation programs.
Since the September 2008 shift of Fitch's U.S. life insurance industry rating outlook to negative, Fitch has downgraded 35 out of 55 rated U.S. life insurance groups one or more times. Over the same time period, Fitch has upgraded two U.S. life insurance groups. The large majority of the rating downgrades during this period were limited to one to two notches. While ratings of U.S. life insurers have been broadly affected by the financial crisis, the limited magnitude of the rating downgrades reflected the industry's relatively stable liability structure and strong capital position going into the credit downturn.
Fitch's sector outlook assumes a continued, albeit weak, economic recovery with modest GDP growth and continued high unemployment levels. Fitch's outlook does not incorporate exogenous shocks to the economy, and will factor in such events should they occur. Fitch's expectation for CRE-related investment losses are closely tied to Fitch's economic assumptions. Fitch continues to believe that the industry's CRE-related loss exposure is manageable and has been reasonably factored into existing ratings under Fitch's stress testing methodology.
From the perspective of interest rate risk, over the near term, minimum rate guarantees incorporated in the policyholder accounts of the U.S. life insurance industry will limit the ability of life insurers to maintain interest margins due to low investment yields. Longer term, Fitch is concerned that strategies that life insurers may be using to reach for additional yield will make them vulnerable to disintermediation and asset-liability mismatches in a rapidly rising interest rate environment. Such strategies could include extending portfolio durations and asset-liability mismatches, accepting higher levels of lower rated securities, and amassing sector concentrations.
© 2010 RIJ Publishing LLC. All rights reserved.
Advisors/Planners/Reps , Regulations/Legal , Company/Trade Group News, News,
SIFMA Urges Uniform Standard for Advisors, Brokers
The Securities Industry and Financial Markets Association (SIFMA) has submitted comments to the Securities and Exchange Commission (SEC) in advance of its study on the obligations of investment advisers and broker dealers.
In comments to the SEC, SIFMA highlighted the following key principles the Commission should focus on during their six month study:
• The interests of individual investors should be put first. When providing personalized investment advice to individual investors, broker-dealers and investment advisers should deal fairly with clients.
• Broker-dealers and investment advisers should appropriately manage conflict of interest by providing individual investors with full disclosure that is simple and clear and allows them to make informed investment decisions.
• Individual investors should continue to have access to a wide range of investment products and services, a choice among financial service provider relationships and options for paying for financial services and products.
• Any standard of conduct adopted by the SEC should reduce confusion about existing legal and regulatory regimes by being the exclusive uniform standard that applies to broker-dealers and investment advisers when providing personalized investment advice about securities to individual investors.
In addition, SIFMA requested that the SEC ensure that broker-dealers be able to provide individual investors with best execution and liquidity as principal and offer proprietary and affiliated products that certain investors desire. As noted in the letter, broker-dealers offer a variety of products on a principal basis, including fixed-income products such as municipal bonds, initial public offerings and other underwritten offerings.
The comment letter can be found at the following link: http://www.sifma.org/assets/0/232/234/124802/bcb2b9b1-5a0f-4f20-bda3-690160807abb.pdf.
© 2010 RIJ Publishing LLC. All rights reserved.
Advisors/Planners/Reps , Annuities, News,
Jefferson National Offers DFA Funds
Jefferson National, issuer a flat $20/month insurance fee variable annuity, now offers access to funds from Dimensional Fund Advisors. Dimensional’s funds are available tax-deferred to financial advisors who use Jefferson National’s Monument Advisor, the number one RIA-sold VA for three consecutive years according to Morningstar VARDS Data.
Through the new offering, advisors can access six funds:
- VA Global Bond Portfolio
- VA US Targeted Value Portfolio
- VA US Large Value Portfolio
- VA International Small Portfolio
- VA Short-Term Fixed Portfolio
- VA International Value Portfolio
Jefferson National’s Monument Advisor offers more than 250 investment options, or five times the number offered by most VAs, the company said, including the most subaccounts with the Five Star and Four Star Morningstar Rating for a second consecutive year.
According to Cerulli Associates, the fee-based advisory market is one of the fastest-growing segments in the financial industry, with assets topping more than $7.2 trillion as of 2008, and more than 65% of brokers surveyed said they would be interested in going independent.
© 2010 RIJ Publishing LLC. All rights reserved.
The Decumulation Beat,
The Big Red Stag's Mistake
Like many students of the variable annuity game, I have been watching The Hartford Financial Services Group’s recent public relations disaster closely. My first thought: what a terrible waste of brand strength. Even though The Hartford has struggled rather publicly through the financial crisis—it needed a $2.5 billion infusion from Allianz SE and $3.4 billion from Uncle Sam—its brand has held up pretty well.
But this latest incident could knock a few points off the Big Red Stag’s antlers.
It could also snowball into more than just a public relations disaster. At a time when the Treasury Department is about to auction The Hartford stock warrants to recoup TARP money, and when the Securities and Exchange Commission is pondering the suitability/fiduciary standard for broker-dealer reps, a news story that raises questions about the financial stability of any insurer or the integrity of any reps could have wider implications. On Tuesday, in fact, the Connecticut insurance commissioner, Tom Sullivan, said he would look into the matter.
That may be why one industry observer told me that the issue is "very touchy" and that other variable annuity issuers "are watching it closely."
If I read Darla Mercado’s recent stories in Investment News correctly, someone at Hartford Life Distributors mailed letters to owners of certain Hartford variable annuities—presumably including ones with underpriced living benefits that were sold during the pre-Crisis VA ‘arms race’—suggesting that they talk to their advisors about possibly exchanging those contracts for contracts with the insurer’s less risky-to-the-issuer Personal Retirement Manager income rider. (See RIJ’s article on the product.) The letter is signed by a vice president of product management at Hartford Life Distributors.
Late last month, at least some contract owners apparently received those letters before their advisors received similar letters from The Hartford giving them a heads-up about the communication with clients. That mix-up alone would be a violation of protocol, and a good way to jeopardize Hartford's hard-won third-party distributor relationships. It's an unwritten law that the client belongs to the advisor, not the carrier.
The company has explained that the client letters went to people whose contracts were out of the surrender period—if it were otherwise, this would be an uglier matter—and that such letters were not unusual. "The letters to advisors simply didn't go out on time," according to the insurer. I've seen both letters. They are brief and dry. To say that the letters "entice" owners to exchange contracts, as the Investment News article did, seems to me like an exaggeration.
I was told by one observer that such letters, especially to clients, are "not typically" sent out by VA issuers, however. That person also noted that both letters contain headlines that mention an "Exchange Program." The use of the word "program" apparently triggers a requirement of SEC or at least FINRA approval. The implications of that, if any, aren't clear.
Worse case scenario: The letter to clients could foster speculation that The Hartford is worried about the risks associated with contracts still on its books, which leads to questions about its financial stability. The letter also allows speculation that the original contract may have been less than suitable for the client, which raises questions of advisor integrity or competence.
Those are not questions that anyone in the insurance or brokerage industries wants anyone to be asking. The annuities industry, which two years ago had to deal with the NBC Dateline fiasco involving indexed annuities, doesn’t need another image-flaying scandal. Neither does The Hartford.
A few weeks ago, in Cogent Research’s Advisor Brandscape 2010 research study, the reputation of The Hartford’s variable annuity business was still very high among advisors. The company’s VA sales had fallen to 18th place at the end of the first quarter of this year—perhaps by design, as CEO Liam McGee suggested in statements last spring—but it still ranked as high as third in brand imagery, trailing only industry leaders MetLife and Prudential.
Advisors don’t necessarily see the Hartford as an innovator, the study showed, but 34% of advisors considered the company a “leader in the VA industry.” Regional broker/dealer reps in particular held it in high regard. Bank advisors ranked it second among VA issuers in terms of “good value for the money” and third overall in “offers the best retirement income products.”
But the trend has been negative. From 2009 to 2010, the company slipped from fourth place to seventh place in brand equity score. And while it still ranked first in advisor market penetration, with 44% of advisors listing it among their VA providers, it lost ground in the percentage of advisors who considered it their primary VA provider.
Starting in late 2009, the variable annuity market has split starkly into those companies who are truly committed to the product and those who, post-Crisis, had serious doubts about the wisdom of selling long-term equity puts. Prudential, MetLife, and Jackson National are committed. The Hartford, John Hancock and ING have had second thoughts. Tellingly, the leaders have stuck with generous income riders while doubters switched to simpler products with lower fees and more modest promises. The public, and advisors, prefer the generous products.
It’s somewhat ironic that The Hartford wanted to get investors out of the type of product that’s justifiably more popular—because of its richer terms—than the one that it’s trying to lure investors into. In hindsight, the company might have capitalized on the good will established by those rich promises rather than trying, it now appears, to renege on them. Failure to accept a sunk loss is a mistake that behavioral finance experts warn amateurs to avoid.
It is my understanding that, accounting issues aside, even the most generous-looking lifetime income guarantees don't represent a loss for the issuer unless or until the contract owner(s) are still alive when the account value (as a result of allowable withdrawals and/or poor market performance) goes to zero. Of course, there may be a method to this madness that escapes me or that The Hartford isn't sharing.
There’s no need to scold The Hartford here, because Bob MacDonald, the former CEO of ITT Life, a one-time Hartford subsidiary, did a thorough job of it on his blog this week. MacDonald, a legendary and controversial figure who built an equity-indexed annuity empire at Allianz Life of North America in the first half of this decade, writes:
“It is obvious that despite all that has happened to the success and good name of Hartford over the past few years, the management of the company is still highly capable of consistently making decisions that are not in the best interests of the company. Clearly the CEO, who has no insurance experience, has demonstrated his inability to change the environment of self-destruction at Hartford.
“Knowing the past actions of Hartford management and its current arrogant attitude toward customers and the distribution system, one could rightfully question ever buying or selling a product of the Hartford. It seems – as I have suggested previously – the only way to save Hartford from itself is for the company to be acquired by another insurance organization that can clean house and return Hartford to the great company it once was.”
That type of righteousness will probably be tough for the folks at Hartford to hear, knowing that it comes from the mischievious author of books with titles like Beat the System and Cheat to Win.
The Hartford’s letter-gate problem might merely reflect one company’s or one executive’s idiosyncratic error—or, to be polite, the appearance of error. And, in ordinary times, the whole mess might vanish overnight. But these aren't ordinary times. Investors are nervous, markets are volatile, a potentially game-changing election is coming up, and the reputation of the financial services industry is under examination. A cap-gun could set off a panic.
© 2010 RIJ Publishing LLC. All rights reserved.