This Month:
Reclaiming the future: The time is now to restore trust and rebuild your clients' retirement dreams
Advisors hold treasure map to client's retirement success
'Interesting times' demand greater fiduciary support for retirement plan sponsor
Creating vision, process for retirement management professionals
Altered retirement reality requires new options for income growth and protection
Agency Profile: Global Vision Advisors
Success in the retirement plan market begins with solving problems
Americans' confidence stabilizing, but retirement preparations continue to erode
Retirement income uncertainty reaffirms advisors' vital role
Retirement Redefined
Stand Alone Living Benefits emerge
'RMDs' and the '70½ Tax Trap'
Saving for retirement just got easier
It's 2010, do you know what your estate tax is?



Reclaiming the future:

The time is now to restore trust and
rebuild your clients' retirement dreams


by Robert DeChellis

Robert DeChellis is president of Allianz Life Financial Services, LLC, a division of Allianz Life Insurance Company of North America. He can be reached at . robert.dechellis@allianzlife.com.

They say that timing is everything.

With something as seemingly long term as retirement planning, timing shouldn't be such an important issue. But with a retirement system so vulnerable to equity markets, the events of late 2008 taught us that timing still plays too big of a role in the success or failure of our retirement plans.

At the beginning of 2008, total global equity of investable assets was roughly $60 trillion. At the end of the year, that number shrank to below $30 trillion. For the person who was set to retire on January 1, 2009, that short period of time could have caused as much as a 40 percent loss in their overall portfolio and been the difference between a comfortable retirement and putting off retirement for years.

As a result, people are more fearful about retirement planning than ever before. According to Reclaiming the Future, a recent study from Allianz Life Insurance Company of North America that surveyed more than 3,200 U.S. adults age 44 to 75, 92 percent of respondents said they believe there is a retirement crisis in this country. Furthermore, 61 percent fear outliving their money in retirement more than death and more than a third (35 percent) feel financially unprepared for retirement.

This uncertainty about retirement income shouldn't come as a huge surprise as the three historical pillars of retirement income, Social Security, defined benefit/pension plans, and personal savings, were already on shaky ground prior to September 2008. The market crisis only served to shine a brighter spotlight on the significant challenges facing each, issues that could eventually topple the whole system.

Much has already been written about Social Security's ability to remain solvent for the generations of baby boomers that begin hitting retirement age next year. According to the 2009 Annual Reports from the U.S. Social Security Administration and the Medicare Board of Trustees, in 1950, there were 16 workers for every one retiree. By 2025, that number will be down to two. This will see a huge mass of population begin to retire and live longer while healthcare costs continue to rise. At the same time, there are fewer contributing to Social Security and more collecting their Social Security benefits.

These concerns were echoed in my company's survey as nearly 40 percent of people felt they were more likely to get hit by lightning than get their full due from Social Security. Seventy-seven percent of respondents also said they can't rely on the government and even more (78 percent) said they feel they have to solve things themselves.

Add to that the virtual disappearance of defined benefit/corporate pension plans and that leaves the bulk of the responsibility for retirement income on the individual's personal savings. As the equity market downturn in 2008 proved, when 30 to 40 percent can be lost in a matter of months, you have the perfect storm for a financial crisis.

It stands to reason that people would have learned some hard lessons from 2008 and taken a more active role in retirement planning, but that has not proven to be the case. Although the study showed that 44 percent are uncertain when they can stop working and more than half (51 percent) said they now realize they need to plan for a comfortable retirement, many are still too worried or fearful to actually do anything about it.

Thirty-two percent thought that creating a solid financial plan for their retirement would be more challenging than climbing a 14,000 foot mountain. Similarly, nearly half (47 percent) think they have a better chance of guessing how many gumballs are in the jar at the local county fair than determining exactly how much money they'll need at the point of retirement.

Most troubling is that when they do attempt to gauge their retirement income needs on their own, Boomers' planning skills are woefully inadequate. When asked how much yearly income is needed in retirement, respondents indicated a median income of $59,000 per year. Unfortunately, they were off by a factor of nearly three times too small when estimating how much they'd need to save to create that level of household income.

Clearly there is a tremendous opportunity for financial professionals to show their value and help clients obtain a financially secure retirement through developing careful, intelligent strategies. In fact, there probably hasn't been a time when financial professionals are more relevant than they are today. Even more exciting, the Reclaiming the Future study proves that people are eager for assistance and willing to try new tactics if properly educated.

This doesn't mean that financial professionals need to abandon everything they've done in the past, but it does suggest that new strategies are necessary to give clients what they need. Eighty-six percent of Boomers said it was either somewhat or extremely important for their financial professional to help them ensure the safety of a significant portion of their nest egg and 85 percent said it's important that their professional help make sure they have adequate and guaranteed income for life. This focus on safety was deemed more important than ensuring clients have the highest possible return on their investments or making smart recommendations on which stocks to buy.

Thus, in addition to devising strategies for accumulating wealth, our industry needs to do a better job of planning how to effectively distribute that wealth. Traditionally, most of our training has been on the various ways to accumulate wealth, using different asset allocation strategies, determining risk profiles and calculating timeframes. What we're short on is a consumption analysis that will determine what clients need when they retire and how to estimate exactly what those expenses will be.

If we start with that question, we can reverse-engineer the planning process to give the client the best opportunity to achieve financial success with their retirement income. This is especially true when it comes to the financial products that will help them reach their goals.

When asked in the study which they think is more attractive, a financial product with four percent return and a guarantee not to lose value or a financial product with eight percent return with market vulnerability, four times as many (80 percent) chose the product with guarantees. Furthermore, 69 percent of respondents felt a financial product guaranteed not to lose value was more important than the ability to provide a high return.

Annuities that offer income guarantees can help, but many financial professionals are still reluctant to recommend them. The study showed that biases against annuities are based on opinions developed more than 20 years ago. In addition, a whopping 64 percent of respondents admit that they have not actually researched or even looked at annuities since that time.

Unfortunately, these negative opinions have also affected the financial planning community, at the expense of the client. For that to change, financial professionals must take a more active role in educating themselves about today's annuities. Annuities have changed so much, even within the last five years, that every financial professional should put the same amount of time and effort into learning about modern annuities as they do about investing and accumulation of wealth.

There is a huge opportunity for financial professionals to show their true value and communicate the importance of a balanced portfolio that offers some level of guaranteed lifetime income. Using this approach will help build a more meaningful client relationship and make sure that timing isn't such a critical part of retirement planning success.

Back to Top



Advisors hold treasure map to client's retirement success


by R.H. "Rick" Carey

R.H. "Rick" Carey is Principal and Founder of Retirement Income Solutions Enterprise, Inc. He can be reached at rcarey@theriseenterprise.com.

In the midst of the Wall Street bailouts and public stimulus efforts, Yale Professor of Economics and Finance Robert Schiller wrote an insightful essay for the New York Times: How About a Stimulus for Financial Advice? He eloquently argued for government bailout plans to include subsidized financial advice for everyone. He established that the independent financial advisor should be offered the opportunity to provide financial advice pursuant to such a plan, "that giving the general public access to trained advisors would be a boon for the country at this time of doubt and distrust."

Schiller recognized the unique role financial advisors must play in advancing individual financial education. It is the financial advisor, not financial institutions, public education, or government, who is in the best position to help solve this growing problem.

In early 2010, a Cogent Research Investor Brandscape study found low consumer confidence in financial institutions as well as dissatisfaction and low loyalty to financial advisors. The study's findings suggested "considerable room" for image improvement.

Still, further market research from Mintel Comperemedia in 2009 confirmed that Americans actually want more financial knowledge and opportunities to participate in financial education activities, the wide variety of financial support services and interactive materials provided by the Internet is not enough. "Financial literacy initiatives could help build public trust in financial brands, establish loyal customer relationships, and help foster a more responsible, informed public," suggested Susan Menke, Mintel's Comperemedia vice president, in an October 2009 interview with Planadviser. Yet the survey found that only 38 percent of respondents planned to turn to a financial advisor for this information and that less than 33 percent said they would seek the advice of a financial advisor about how to invest money.

Research conducted by LIMRA International into consumer financial behavior confirmed that life insurance purchasing decisions were put off by 80 percent of those surveyed, simply for fear of making the wrong decision. In the end, there is no substitute for the one-on-one, face-to-face interaction with a trusted financial advisor. It's not much different than the relationships people have with their doctor. They can research their aches and pains on the Internet, but in the end they need and want the doctor's help and counsel.

The financial services industry has spent billions on financial preparedness campaigns and support materials during the past few years. If independent advisors are to successfully combat the growing number of competitors with huge advertising budgets and unlimited Internet resources, they must aggressively plan to market and defend the advantages of their independence and the unique role that only they can play.

Many advisors are likely to say they already provide financial education to prospects and clients. Yet this "education" is often focused on presentations connected with the sales of financial products and services. Advisors who have incorporated a strategy of periodically conducting "financial education only" seminars or office presentations separate from any product or service promotion say they have experienced a significant increase in both referrals and qualified prospecting leads.

The "secret" of maximizing the opportunity

There are two essential "secret" ingredients that advisors must include to maximize success. We've already confirmed the first, active participation in the education process. Whether in a seminar or an office setting, this should include such enhancements as interactive financial tools or calculators, short commercially available videos or parts of retirement television documentaries, role-playing, simple case studies, audience quizzes, or financial games.

It's also important to offer prospects and clients take-away opportunities. Here are two examples: (1) A financial education handout, printed or digital, such as a CD or DVD, which might include interactive tools, calculators, or videos used in your presentation. Many are commercially available, inexpensive, and require little effort on your part. (2) A periodic, education-only, e-mail follow-up, which would include similar digital or printed references. This second type of follow-up is better because it keeps you in contact over an extended period. Successful advisors often have stories of prospects who later became clients solely because of persistent follow-up efforts.

The second equally important ingredient is best summarized by the Pulitzer Prize winning journalist Hedrick Smith. When asked to give the keynote address at the AARP-EBRI 2006 Conference on Pension Reform, Smith had this to say regarding the most important finding from the production of his PBS Frontline documentary "Can you afford to retire?"

You have to go back to a far more basic level of communication with people.

They don't have any idea how to figure it out, what it is that they need, why retirement is so expensive.

Here is a specific example of how to meet this "far more basic level of communication": Say you offer a seminar on the most critical risks in retirement and what to do about them. Start with the most basic foundational concepts, which might include longevity, inflation, health care, withdrawal, and market risk. Don't presume your clients or prospects have a good grasp of what the basic retirement risks are and, more important, how they are interrelated. There is a very high probability that they don't.

By simply changing the way you look at the process and implementing the findings from the consumer research, you join other advisors in taking advantage of this low-effort, high-reward opportunity. Act on this simple secret to prospecting and client referral success. Become known in your community as the education advisor, and stay ahead of the competition now, the timing could not be better.

Back to Top



'Interesting times' demand greater fiduciary support for retirement plan sponsors


by Jamie Ohl

Jamie Ohl is senior vice president and director of The Hartford's Retirement Plans Group, which provides record-keeping services for 401(k), 403(b), 457 and 401(a) defined contribution retirement plans as well as cash balance defined benefit plans. She can be reached at jamie.ohl@hartfordlife.com.

The Chinese philosopher and educator Confucius is reputed to have uttered the infamous curse, "May you live in interesting times." Confucius lived 2,500 years ago but his words perfectly describe today's retirement plans marketplace.

While the latest headlines have been dominated by legislative activity on healthcare and financial services regulatory reform, the Obama Administration and Congress have also been taking steps to address retirement security. Efforts are underway to make retirement savings plans available to more Americans, encourage the use of guaranteed lifetime income, and strengthen the protections for retirement plan participants. These are admirable objectives, and policymakers should be applauded for pursuing them.

Of course, changes to long-established regulations could bring new challenges for both retirement plan providers and plan sponsors. The most significant concerns for plan sponsors relate to their status as a fiduciary to the plan. Few things make employers more nervous than becoming a fiduciary. Plan sponsors are expected to act solely in the interest of plan participants and their beneficiaries or face the possibility of civil or even criminal sanctions.

Confucius no doubt was aware of these potential pitfalls as he uttered his second curse: "May you come to the attention of those in authority." Fortunately, though, plan sponsors can obtain assistance and tools to help manage their fiduciary responsibilities and liabilities by working with their plan provider. These tools are built upon a foundation laid by the Employee Retirement Income Security Act of 1974 (ERISA), which spells out the fiduciary obligations of plan sponsors and steps that plan sponsors can take to limit their potential exposure.

Fiduciary Protections

ERISA Section 404(c) offers plan fiduciaries limited protection when they adopt specific behaviors:

Most large employers, the Fortune 500, possess decades of experience serving as fiduciaries and have the resources and expertise to handle these duties with little or no outside help. But small- and medium-sized plan sponsors, those with retirement plan assets under management of less than $50 million, have more modest staffs and limited expertise when it comes to performing fiduciary duties. They need the support available from a fiduciary service, typically made available through their plan provider, to help meet their responsibilities.

True Fiduciary Services

Best-in-class plan providers make available true co-fiduciary services from an independent, acknowledged fiduciary that offer contractual investment selection and monitoring, often at no additional cost. Lesser services merely provide a certificate of promise to share fiduciary responsibilities.

A true, high-quality fiduciary assurance service provides investment research, selection and monitoring to help both with the responsibility and liability associated with the selection of investment options offered through an employer's defined contribution retirement plan. The investment selection process should include unbiased guidance from an independent third party. As a financial advisor, you should work with only those plan providers that are equipped to help plan sponsors manage their fiduciary duties by providing:

Quarterly Reports

Fiduciary responsibility typically begins with offering appropriate investments for plan participants. However, investment markets are dynamic, which means plan sponsors need to tightly monitor changes in investment options within their plans. The best fiduciary services keep plan sponsors apprised of changes by delivering quarterly reports that include:

Your plan provider should provide a sample Investment Policy Statement reflecting the retirement plan's specific goals and objectives. This serves as an important legal and regulatory tool to demonstrate that the plan is monitored objectively.

Investment Recommendations

In evaluating a fiduciary service, take the time to review the process used to make investment recommendations. A quality fiduciary service will have a disciplined, well-thought-out process that includes the following:

On the Horizon

Plan sponsors have found tremendous value in securing the right fiduciary service. As the definition of a fiduciary and the responsibilities associated with being a fiduciary accelerate, however, the nature of those services and their value will need to keep pace.

Which brings us to the third and final curse uttered by Confucius: "May you find what you are looking for?" Federal officials have discussed tightening fiduciary standards but the exact outcome, at least initially, may not be what regulators expect.

Most big companies will manage their new fiduciary responsibilities without a hitch. But many smaller- and even middle-sized firms may well need assistance to keep their retirement plan in compliance with the new regulations. It's a safe bet that the new rules will at first create considerable angst and confusion in the market.

That's where you come in as a trusted financial advisor. You can provide tremendous value to plan sponsors by helping them sort through these issues and obtain the right assistance.

Retirement plan providers are already kicking the tires on new levels of service that will raise the bar on expectations by plan sponsors. Although a new service model has yet to emerge, it's possible that some providers may eventually expand their fiduciary services to remove more of the burden from plan sponsors by taking over administrative, trustee and fiduciary duties. Sorting out the winners and losers among retirement plan providers may ultimately rest on who can introduce the best fiduciary services to the market in the shortest time.

Don't let plan sponsors go it alone. As the regulatory landscape continues to evolve, make sure you are working with your plan provider to provide the best fiduciary services possible to your plan sponsors. You may wind up looking wiser and more revered than Confucius himself.

Back to Top



Creating vision, process for retirement management pros


by Stephen Mitchell

Stephen Mitchell is Chief Operating Officer for the Retirement Income Industry Association. He can be reached at sm@riia-usa.org.

When the bottom dropped out of our economy as well as our financial markets in 2008, it became clear that traditional retirement planning models weren't working. Recent events have shown that the planning approach was overly focused on a single aspect of the advisory process and did not take into account all of the requisite complexities of retirement income planning and management. This has put millions of baby boomers' retirement security at risk.

Financial advisors of the future must go beyond today's conventional wisdom to embrace a new and much more complete process if they are to provide successful retirement income solutions to clients. Capitalizing on its "view across the silos" perspective, the leadership at the Retirement Income Industry Association (RIIA) addressed the need and developed a new and comprehensive designation for the advisor of the future, The Retirement Management Analyst. RIIA believes that this cutting edge paradigm for education and training will be the key to reviving investor confidence in financial advisors and the financial services industry overall. As the curriculum was being developed, complex challenges were described by RIIA member firms, financial advisors and clients themselves. The solution came together in four distinct, but coordinated parts:

To earn an RMA designation, a financial advisor or other professional must complete a rigorous educational and ethics training curriculum that focuses numerous core disciplines.

Building the plan to mitigate risks

The objective is to learn to create complete plans for retirement income that assures the client a floor of retirement income, provides appropriate exposure to upside potential, and is based on each client's unique goals and circumstances.

Mastering the advisory process

Using a simple "hub and spoke" metaphor, the client is at the center and the process looks at the household balance sheet, creating a life-cycle profile, assessing retirement risks, risk management allocation, and choosing the right products. The objective is to expand the focus from traditional Financial Capital to now include Human Capital and Social Capital.

Retirement Management Analyst designation pilot-A success for advisors and industry professionals

With much anticipation, the first RMA study review and exam were piloted as in a full day session following the RIIA Spring Conference. Pilot participants benefited from a study session with Franois Gadenne, Executive Director and Chairman of RIIA, and Mike Zwecher, co-authors of the RIIA Advisory Process and a demonstration on the online teaching software platform which was developed by HealthView Services. In addition, the pilot participants provided their constructive criticism and recommendations for the next phase of the RMA launch which will be another review session and exam on October 4th, 2010 at the Boston Hyatt Harborside Hotel. Those interested in participating in the October 4th program to obtain the RMA Designation should register at www.riia-usa.org.

Congratulations to the first group of candidates who successfully completed the program and the examination:

Back to Top



Altered retirement reality requires
new options for income growth and protection


by Jamie Shepherdson

Jamie Shepherdson is president, retirement savings at AXA Equitable Life Insurance Co. and can be reached at james.shepherdson@axa-equitable.com.

The face of retirement has changed forever

The typical retirement period is now considered to be longer than at any time in history. With traditional pensions continuing to decline and the future of Social Security uncertain, the need for Americans to take control of their retirement planning has never been greater.

Market volatility, longevity, health care costs, and the potential for rising taxes, interest rates and inflation all threaten retirement income security. The recent economic crisis exposed the vulnerability of relying exclusively on employer 401(k)s for retirement security. Clearly individuals need to rely increasingly on their personal savings to supplement their retirement income, and they need product solutions that provide opportunity for investment growth performance, while also offering downside protection.

Now consumers, especially boomers, are focused on quickly rebuilding their retirement nest eggs but are also skittish about the markets. They are as fearful of not being invested in stocks as they are of stock-market risks. Many have fled to fixed-rate products at just the wrong time. Interest rates today are at historical lows.

In fact, opting for fixed-rate products may even compound recent losses. Not buying back into the market and missing the upturn could put savers at considerable risk. Intellectually, consumers know this and want the chance to outperform the market. They want to be able to invest more of their money for growth, but they don't want to further jeopardize their retirement security.

A different approach to growing and guaranteeing retirement assets

Recent market volatility exposed the need not only for change in how individuals grow their investments and protect them, but also for insurers to design products that are better suited to help them meet those needs. As risk managers, insurers are in a unique position to play an active and forward-looking role in retirement preparedness for baby boomers. Only insurance companies can offer the opportunity for investment growth with downside protection, through annuity products. The crisis has emphasized the importance of designing prudent, sustainable products that help clients adapt to changing market conditions and to their own evolving needs as they approach, enter and move through retirement. New designs have the potential to significantly transform how retirement savers view the role that annuities can play in their portfolios, mainly by being more flexible.

Responding to the challenge

Today, consumers are increasingly looking for ways to invest for growth and restore damaged portfolios, but without taking inordinate risk. It is this demand that led to the development of a platform encompassing two interactive accounts, one focused on investment performance, the other on core investments working in parallel with a guaranteed account that protects retirement income and also can protect any investment gains for beneficiaries.

The performance account offers a broad spectrum of investment choices across a wide range of asset classes and investment styles to allow clients the ability to pursue the primary goal of growing retirement savings in the way they find most comfortable.

The core investments in the "protection account" allow for choice among asset allocation models and index portfolios and support the minimum income-growth guarantee and the death benefit. To help anticipate and protect against the possibility of rising interest rates, the protection account's guaranteed "roll-up" rate is declared annually at one point above an average of the 10-year Treasury rate. The rate can adjust to a maximum of eight percent, but will never go below four percent.

A dual-account platform, including the benefit of tax deferral, allows investors to pursue more aggressive investment strategies that can be tailored or customized to where they are in their retirement lifecycle. It allows them to choose if and when they want to beef up the guarantee features, using any gains in the performance account without triggering a tax event. Unlike traditional variable annuities, investors have the flexibility to change investment objectives through exchange transfers and withdrawal strategies as their needs evolve, all on a single platform. They can make transfers that are tax-free and cost-free among investment portfolios and sweep gains tax-free from the performance account into the downside income protection account to build lifetime income benefits and respond to changing personal needs and macro-economic conditions.

The emerging consumer demand is summed up in a word: flexibility - the flexibility to pursue an aggressive growth strategy, the flexibility to adapt that strategy to changing markets, and the flexibility to shift the emphasis from growth to protection in response to changing personal needs throughout ones life. It is this flexibility that, unlike a traditional annuity, makes this design a more viable option for younger savers, because they don't have to pay for the guarantee until they decide they need it.

The way consumers think about preparing for retirement has changed probably for at least an entire generation. The agents of that change are unprecedented levels of investment and interest-rate volatility, newfound fears of rising taxes and inflation, and the realization that we are all living longer. All these factors threaten to erode retirement security to an extent that was previously unimagined. Clearly the products of yesterday can't meet the post-crash challenges of today and tomorrow. Clients need their own recovery and growth strategies that offer a broad range of tailored investment options and dynamic retirement income benefits - in other words, the best of managed money and the best in insurance protection.

Back to Top



Agency Profile: Global Vision Advisors

Redefining the Wealth Planning Process

by P.E. Kelley, L&HA Editor

Comprehensive financial planning has taken on many identities over the past decade. There has been a movement from values-based planning to life planning and holistic planning, which provide more than just financial solutions for clients. Global Vision Advisors (GVA) is a wealth advisory firm in Hingham, Mass., that was built out of this movement. GVA provides a client experience and deliverables with a goal of clarifying and fulfilling their clients' vision for their future.

There are a lot of financial firms, large and small, that claim to provide holistic or values-based planning but few have a defined process or proven methodology to produce measurable results. GVA is designed to bring three areas of expertise together to shape every client experience. First is an education of today's global economic reality. Second is a discovery process to help people achieve clarity for what they want for themselves, their family and society. Lastly, GVA provides knowledge and experience to offer advice, resources and solutions for a number of scenarios.

We are living in uncertain times that call for well thought out and decisive action. Too often people delay taking important actions because of external circumstances. By understanding today's global economy, investors can begin to think about making proactive decisions. Clients who have an understanding of global events are more capable of forging their own path. The U.S. economy as a whole does not have to be reflected in every individual or family's economy. GVA provides insight to what is happening globally and direction on where to succeed individually.

GVA utilizes a decision-making program, called the Global Wealth Optimization System, that empowers clients to gain clarity and achieve confidence. The system divides financial planning into two parts and is illustrated by a planning horizon. Above the horizon, GVA helps people clarify, document and manage their vision, mission and values. GVA and their clients discern what decisions need to be immediately made and why. Below the line, GVA helps people be more intentional with their wealth and finds appropriate strategies, tactics and tools to suit the client's needs. GVA helps determine what is needed and how best it can be done.

Before any decisions are made, clients first create clear objectives or outcomes. Knowing how to fulfill your intentions begins with knowing what your intentions are. GVA's discovery process is the foundation for creating wise decisions and producing confident results. The process allows clients to take the uncertainty out of their future and to be more intentional with wealth. The discovery process is the first step in GVA's relationship with clients. Clients are asked what is important to them, not only for themselves, but for their families and their place in society. GVA continues this conversation with clients through one-on-one meetings and experiential-based processes. These inquiries are designed to encourage individuals to reflect upon what they value most and what they intend to achieve in their lives.

After helping clients develop a more complete knowledge of the ideas and objectives that are central to their lives, GVA explores how client concerns and principles can shape their decisions and guide them to become more intentional regarding their time, relationships, health and money. The clarity achieved from answering these questions guides the relationship between each client and Global Vision Advisors and shapes a plan of action.

The goal of the discovery profile is to help clients clarify and create the life and results that they want for themselves so that they can move into each new stage of life with confidence. The process involves the following five steps.

In Step 1, GVA helps clients capture and define their vision for their future and what is important to achieve for themselves, family, and society. GVA documents client responses in a written report that allows clients to reaffirm their vision and share it with others who are important in the process.

In Step 2, GVA works with clients to measure what is needed to accomplish their goal for the future and to quantify each financial outcome.

In Step 3, GVA helps clients balance their wealth and allocate resources to time, health, relationships and money. GVA assists clients as they prioritize their plan and decision making.

In Step 4, GVA helps clients discern among available choices and how to implement solutions.

In Step 5, GVA helps clients create an action plan to track progress toward their vision and provide management of the results.

GVA's tag line is "Where Wealth meets Well being." The discovery profile allows GVA to discuss and create a complete vision for their clients' future. They subscribe to the notion that wealth includes one's time, health, relationships and money. This definition is based on their years of experience working with clients to create lasting legacies. When faced with the prospect of death, people begin to reflect on what is most important. How one spent their time on this earth, how they took care of their health and what relationships are most important often get lost in the pursuit of financial wealth. GVA's discovery process helps people put life into perspective and to go about their days and allocation of resources with intent and purpose.

GVA's structured questions and reports are based on the process of moving from a question or thought to knowledge. Clients gain insight from structured questions and reports are created to verify their responses. The client is allowed to revise statements several times before making affirmation statements regarding their intentions. Although this process requires an initial investment in time, it becomes valuable when starting the process of creating action steps and evaluating solutions. GVA's structured questions are designed to go beyond just asking about client goals. They identify values, preferences, supporting resources and outstanding obstacles.

GVA's discovery profile has different processes depending on the client's stage of life. They have a defined process for accumulation, financial independence and financial transcendence. Accumulators are typically high income earners and/or business owners and are looking for how best to accumulate wealth. Financial independence is appropriate for people in or contemplating retirement and looking to protect wealth and sustain income. The financial transcendence profile is for people that are planning beyond their own needs and looking to effectively give to family and charity.

After the profile, there are more advanced discovery processes available if needed. Once clarity is achieved in relation to a problem or goal, solutions are presented to help the client take action. All ongoing work with a client is centered on their goals as well as traditional financial statements and reports.

The planning approach GVA utilizes allows more time for building strong relationships based on what is most important to individual clients. When both client and advisor have clarity, the appropriate solutions are easily identified. Ultimately this leaves clients with confidence in the decisions they are making, which is the ultimate goal of the GVA process.

Back to Top



Success in the retirement plan market
begins with solving problems

by E. Thomas Foster Jr. and Christine Chaia

E. Thomas Foster Jr., J.D., is The Hartford's national spokesperson for qualified retirement plans. Foster works directly with broker-dealer firms to promote the sale of 401(k) programs and other qualified retirement plan products and to help them build their retirement plan business. Christine Chaia is assistant vice president of marketing for The Hartford's Retirement Plan Group. Chaia is responsible for marketing corporate retirement plans through financial advisors and helping them enhance their ability to serve plan sponsors.

With more than $15 trillion in assets, the retirement savings market offers a seemingly ever-expanding universe of opportunity for financial advisors. But anyone who has served this market over time can tell you that the process of becoming a star begins with two words: "solving problems."

Financial advisors need to offer solutions to help retirement plan sponsors and their participants land on a planet populated by secure retirees. Offering solutions doesn't mean pushing products, though. Rather, the most successful advisors help plan sponsors make the most of their existing retirement plans by managing them more effectively and maximizing their retirement savings.

But you don't need to be a stargazer to discover these opportunities. Many of them can be found within most advisors' local communities and are publicly catalogued. Each year, sponsors of defined contribution retirement plans such as 401(k)s and 403(b)s must file Form 5500 with the U.S. Department of Labor. Form 5500 contains data on a wide number of retirement plan attributes, including employee contributions, participation levels and how assets within the plan are invested.

If used appropriately, Form 5500 can potentially help advisors target dozens of businesses within their local solar system that need help solving problems with their retirement plans. The Form's data can be used by advisors to connect with employers who need assistance in redesigning retirement plans, developing education programs to enhance plan participation, more tightly manage fiduciary obligations, or provide insight into service improvements.

The data is publicly available and is free. Financial advisors can begin collecting this information by visiting Web sites such as freeerisa.com or larkspurdata.com or, in some instances, relying on specialized tools created by retirement product providers. Once advisors hit pay dirt, they are likely to find that many local businesses sponsor retirement plans and need help to ensure those plans are running at maximum efficiency.

Identifying Issues-Form 5500 can help advisors uncover one or more issues that local retirement plan sponsors are wrestling with, including:

Plan sponsors without an advanced plan design-In many instances, simpler defined contribution plans such as a straight profit-sharing plan may make it more difficult or more expensive for a business owner to maximize his or her retirement savings. The maximum annual allowed contribution to a defined contribution plan in 2010 is $49,000 with an additional $5,500 allowed for those who are age 50 and older. For instance, a simple profit sharing plan requires employers to make level contributions to all employees, which could make it economically unfeasible for a business owner to accumulate significant retirement assets within his or her own account. Introducing a business owner to advanced concepts such as Social Security integration, an age-weighted plan or a new comparability plan may help the owner better meet his or her retirement goals.

Social Security integration, which allows separate contribution levels for employees earning at or above the Social Security wage base ($106,800 for 2010) and employees earning below the wage base, can help owners to enhance their own retirement plan contributions.

Age-weighted plans, meanwhile, are designed to benefit older and more highly compensated employees such as business owners. Since older employees have shorter time horizons to save for retirement and are generally compensated more highly than younger employees, age-weighted plans may allow larger contributions by the plan sponsor on their behalf.

New comparability plans tend to favor older, more highly compensated employees (in most cases, the business owner). Plan sponsors can provide different benefits to different groups. Typically, one group will contain owner employees who receive a larger benefit and non-owner employees who receive a smaller benefit. Although employees accrue benefits at different rates, these plans are designed to pass IRS general nondiscrimination tests.

Of course, advanced plan designs are complex and advisors should urge their clients to consult with a qualified retirement plan professional to ensure compliance with applicable laws.

Plan sponsors with an advanced plan design-In most instances, business owners who have implemented an advanced design are already making the most of their contributions allowed under their defined contribution plan. They already understand and embrace the benefits of tax-deferred saving and investing. But many highly compensated owners and executives find they still need to accumulate additional assets to continue their lifestyles in retirement.

One solution to help highly compensated executives enhance their retirement savings is the implementation of a cash balance plan. A cash balance plan is a type of defined benefit plan that, in some ways, looks and feels like a 401(k) plan. Both types of plans express benefits in terms of an account balance, offer tax deferral advantages, and allow assets to be rolled over into another qualified plan or an IRA upon distribution.

Cash balance plans must be funded by an employer annually, which can mean a significant financial commitment. Because of that commitment, a cash balance plan is not a perfect fit for every business. However, for highly profitable businesses and professional practices, cash balance plans offer highly compensated employees and business owners the opportunity to significantly accelerate the accumulation of retirement assets. Under certain circumstances, the benefits of a cash balance plan may also be weighted towards owners, key employees or both. Plan sponsors who consider implementing a cash balance plan should obtain legal advice and special care must be taken if the employer has another retirement plan in place.

Plans with an out-of-state advisor-Out of sight, out of mind is how many people think of long-distance relationships, especially when it comes to a financial advisor. Plan sponsors that lack support from a local advisor may not be receiving the service, education and support that a local person can deliver. In these instances, relying on service from an advisor who hails from the same galaxy can lead to greater responsiveness to questions about the plan and may lead to improvements in participant education, especially from an advisor who may be more readily available to conduct seminars and educational meetings.

Plans that do not comply with ERISA Regulation 404(c)-This code section offers plans and plan fiduciaries limited protection when participants make certain investment decisions. To qualify, plan sponsors should offer plan participants a reasonable opportunity to:

Plans without a fidelity bond-Plan sponsors are required to hold a fidelity bond as part of their fiduciary duties. But Form 5500 indicates that many plan sponsors fail to do so, potentially exposing themselves to litigation over incurred plan losses. More often, however, plan sponsors simply fail to maintain an adequate bond amount to keep up with rising plan assets. Advisors can put themselves light years ahead of their competition by offering invaluable assistance by reviewing plan sponsors' fidelity bond coverage.

Plans with a corrective distribution

A corrective distribution means a plan sponsor has failed a discrimination test and has had to return retirement assets to highly compensated employees. Advisors can be a tremendous help to get these retirement plans back on their intended trajectory by recommending alternative plan designs to plan sponsors. Those alternatives can include a Safe Harbor Plan, the implementation of automatic enrollment, and promotion of the Tax Saver's Credit.

Plan sponsors can take advantage of "Safe Harbor" provisions and avoid the need for discrimination testing by making regular contributions to plan participants' accounts and by following other rules. Typically, employers match employee contributions in the retirement plan and the employer contributions are automatically vested.

Another effective way to encourage employees take advantage of their employer's retirement savings plan is to automatically enroll them in it. Nine in 10 employees participated in their employer's 401(k) plan if their company automatically enrolled them, according to a study by Hewitt Associates. There are specific rules that must be followed in order to implement automatic enrollment.

Modestly compensated employees can qualify for a special federal Savers Credit based on contributions to a defined contribution retirement plan or an IRA. The tax credit can equal as much as 50 percent of their total contribution, capped at a total credit of $1,000, depending upon the level of contribution and the employee's income. The income limit is $55,000 if married filing jointly and $41,625 if head of a household with a qualifying dependent.

Plans with 70 percent or less participation-Plans with low participation rates generally lack adequate participant education. Top retirement plan providers offer highly effective educational programs for participants, including seminars on saving and investing, educational materials, convenient Web sites and even videos. Often, providers have special teams that focus on retirement education and will work closely with an advisor.

Even retirement plans with a high participation rate may be in need of educational help. A plan can have 100 percent participation, but if the average deferral rate is low, participants may need to be convinced about the need to accumulate as many assets for retirement as possible.

ERISA 403(b) plans-New regulations require certain 403(b) plan sponsors to file a complete Form 5500. With many nonprofit employers having to undertake this process for the first time, assistance from an advisor and available support from a retirement plan provider can prove to be critical to making this process go smoothly.

Solving Problems-Form 5500 includes information provided by plan sponsors on all of these issues and many others. By tapping into public search engines � or in some instances special Web-based tools offered by retirement plan providers, advisors can place themselves in the same orbit as dozens of business owners whose companies sponsor retirement plans and who need help on making them run more effectively and efficiently.

Top retirement plan providers can offer significant support in identifying retirement plan sponsors that need help solving issues identified on Form 5500. But once those issues are identified, help may also be available on devising solutions to these issues and, ultimately, creating new circles of relationships and clients. After all, there is no better way to build a successful relationship than to solve a problem, which is what this business is all about.

Back to Top



Americans' confidence stabilizing but retirement preparations continue to erode

Americans' confidence in their ability to retire appears to be stabilizing, now that the economic volatility of the recession has abated, but their self-described preparations for retirement continue to erode.

These are the findings of the 2010 Retirement Confidence Survey (RCS) released by the Employee Benefit Research Institute and Mathew Greenwald and Associates.

However, the RCS also finds that a growing number of American workers are planning to delay retirement, which has negative implications for the U.S. job market, where unemployment is high and layoffs continue to grow. As older workers stay at their jobs longer, the RCS results suggest that fewer existing jobs are likely to open up.

And Americans continue to lack confidence in institutions. They are most likely to express confidence in private employers and least likely to express confidence in the federal government. Both workers and retirees expressing low levels of confidence in banks and insurance companies.

"Americans' attitudes toward retirement have clearly tracked the economy the last couple of years, and that seems to be the case in 2010," said Jack VanDerhei, EBRI research director and co-author of the survey. "Unfortunately, while their attitudes are stabilizing, their preparation for retirement is not. A distressing number of people have no savings at all."

The 2010 RCS marks the 20th wave of this survey, which is the longest-running public opinion study of its kind on Americans' attitudes on retirement and savings.

In addition to looking at long-term trends on workers pushing back their expected retirement age, which had been steadily growing even before the recent economic recession, this year's RCS also reveals other major trends that this survey has been tracking over the past two decades. Among the survey's key points:

Back to Top



Retirement income uncertainty reaffirms advisors' vital role

by John Diehl

John Diehl, CFP, ChFC, CLU, is senior vice president of the Investments and Retirement Division of The Hartford Financial Services Group, Inc. He can be reached at john.diehl@planco.com.

It's no secret that the financial turmoil of the past few years has created havoc with America's retirement readiness. Financial professionals know this better than most because they are now trying to help their clients pick up the pieces of their seemingly shattered retirement dreams.

There is no doubt that many people, after watching their retirement savings erode by as much as 50 percent after the market meltdown, have been left disillusioned. Recent research by my company bears this out. A survey of 750 people ages 45 and older found that the number one financial concern in retirement, simply meeting day-to-day expenses, now dominates all other concerns about retirement readiness:

This research shows that America's confidence about its financial wherewithal has continued to decline over the past few years and, along with it, its optimism about the future, especially retirement. The study also shows that Americans overwhelmingly accept that they are primarily responsible for their own financial security and comfort in retirement. This is certainly a positive given the realities of fading pension plans and the uncertain financial stability of both Social Security and Medicare.

But many people say they lack financial acumen. They worry that they may slip through their traditional safety nets for retirees. And they realize that their financial power to live comfortably in retirement is waning.

UNCERTAINTY REIGNS

The correction of the financial markets, despite a pronounced rebound during the summer and early fall, has created uncertainty over the future. Nearly a third of all people (31.6 percent) who responded to the Web-based survey this summer say they have no idea as to when they will be able to retire and 19.3 percent indicated they will have to postpone retirement for up to two years or more.

Directly related to this uncertainty is the public's relatively low level of confidence about having enough money for retirement. Nearly four in five people (78.3 percent) are less than confident that all of their sources for retirement income, including employer-sponsored pension plans, government-sponsored pension plans and personal savings and assets, will be adequate to maintain their standard of living in retirement.

Underscoring this lack of confidence is the finding that few people are certain about how much income they will need in retirement. Most people (56.3 percent) say they are unsure or have no idea about how much income it will take to live in retirement.

THE PLANNING PRISM

On the surface, much of the news is chilling. But some survey respondents were decidedly more optimistic, better prepared and in a better place financially, if not emotionally, than others. The difference, in a word, was "planning."

Survey respondents were asked to describe how, or if, they had taken any steps to plan their financial future. Those two prisms or lenses, those who had done some planning vs. those who had not, were used to examine some of the financial issues that bubbled up to the surface:

That's the bad news. But there are some positives to come out of this year's survey for those who dig deep enough for the gold underneath the gravel:

THE PLANNING IMPERATIVE

Our research goes a long way towards affirming the positive role that financial professionals play in their clients' lives. Those clients who planned for their financial future are decidedly more optimistic, more confident and better prepared financially to retire compared to those who have done little or no planning.

Financial professionals should take heart. But they should also realize that they have both a tremendous opportunity as well as a tremendous responsibility in reaching out to clients and helping them prepare for the future.

The best place to start is always the beginning, as in beginning a conversation with clients about their goals and dreams. What do they fear? How well-prepared do they think they are as opposed to how well-prepared they actually are? Remember, a financial advisor is often more of a financial therapist, someone who holds his or her clients' hands, listens to their concerns, and helps them through tough decisions and difficult times.

The next step is to take inventory. Perform a gap analysis, taking account of the difference between what clients have accumulated for retirement and what they need for retirement. Take account of all of their assets, retirement investments, savings, home and other property, in calculating what assets are available for retirement.

Make sure to take stock of all sources of guaranteed retirement income. Does the client have a traditional defined benefit pension plan? Does he or she qualify for Social Security, how much and at what age? Depending upon what assets are available and how liquid they are, it might be a good idea to convert a portion of a client's retirement savings into a guaranteed source of income by purchasing an annuity.

Don't forget to talk about expense management. Living in retirement is as much about decisions about income and revenues as it is about reducing and managing expenses. Clients that are most successful in retirement start managing expenses before they retire, reducing unneeded or duplicative expenses. For instance, does your client need to pay for both premium cable channels and Netflix? Could he or she eliminate their health club membership by working out at home? Can they eat at home more and eat out less?

Of course, the most important part of this equation is for clients to continue relying on professional financial advice. Receiving professional advice, whether it's about the latest stock tip, an asset allocation strategy or a complete financial review, is invaluable.

But financial professionals also need to help their clients sort through the financial information that seemingly gushes at them from a fire hose daily. Increasingly, clients need someone to help provide perspective, to bounce ideas off, to obtain encouragement. Sometimes, they just need someone to listen to them.

Back to Top



Retirement Redefined

When did 'hanging it up' come to mean 'just barely hanging on'?

by Wright Edler

Wright Edler is vice president, divisional sales manager, and national spokesman for ING Financial Solutions, based in West Chester, Penn. He can be reached at Wright.Edler@us.ing.com.

Retirement Today

Sit back for a second and envision the retirement earlier generations were fortunate enough to have attained. What comes to mind? An man teeing off a few days a week? His wife basking in the glory of entertaining friends and family at their vacation home in Boca Raton? The couple then jaunting off on yet another breathtaking European trip?

It's probably best for us all to stop looking back fondly on that scenario as a reference point for all things retirement. Unfortunately, that idealistic life-after-the-work-place existence previous generations were fortunate enough to have experienced is just a fleeting memory. It's a reminder of a short, but glorious, period in employment history filled with pensions and a well-funded Social Security program. For Baby Boomers, the path to a retirement, any kind of retirement, will not be as smoothly paved. It's also a road that we, more often than not, must walk down on our own.

To make matters much worse, people still believe they're going to have a better retirement than they can afford. They imagine that idealistic retirement, the one their parents enjoyed, and there's a sense that an equally romantic one awaits them. It doesn't quite work that way anymore, someone's just forgot to tell them. The next generation of retirees may face the challenge of saving, sacrificing and working beyond the age of 65.

Retirement Yesterday

To appreciate the difficulty of giving up work and entering retirement, you first should understand how far we've deviated from where contemporary retirement began. Historically, workers worked until they couldn't work anymore. Have you ever wondered how 65 became the significant mile marker we hold so dear? According to the Social Security Administration, it was just an arbitrary age picked by German Chancellor Otto von Bismarck for one of the first retirement plans in the mid-1800s. What was the average life expectancy in the mid-1800s? It was in the mid-40s. So, in order to realize retirement benefits, you had to outlive your life expectancy by approximately 50 percent.

When the Social Security Act was created in the 1930s, life expectancy had jumped to about 62, according to the Social Security Administration. It was an actuarially flawless plan; the average person would not live long enough to realize any benefits from the program. It was designed to take care of those few people who, in effect, lived too long to work. With the economic expansion in full swing just a decade later in post-World War II America, there were tremendous inflationary pressures. Federal wage controls were instituted to prevent workers from being poached by other companies with higher wages. Employers needed a new value proposition to offer prospective employees: "If you put 20 years on the clock, I will pay you not to work here any longer." Thus, modern corporate pension plans came into being.

It was a pretty safe bet most workers wouldn't make it to retirement age anyway, and if they did, they'd only have a few years left to enjoy their retirement. The difference today is that Americans have much greater longevity. By the standards of yesterday, we would begin to offer benefits today at around age 90.

This economic quandary has confronted modern corporations, and the cost of defined benefits has become unsustainable in a competitive global marketplace. Thus the creation of the 401(k): it allowed corporations to put the responsibility for saving for retirement back onto the employee. Additionally, there is very little formal education on managing personal finance for the millions of workers who hope to retire. They know they want to, but they do not know how to do it. Therein lies the rub. Our industry has done a reasonably good job of helping people with money, but has done a miserable job of teaching the average worker. The goal now is to teach those who hold the dream of retirement to save themselves from themselves.

Retirement Tomorrow

With the onus put on the worker to fund their own retirement, the question is how do we all move forward? Naturally, there's no single solution for everybody. Most of the next batch of retirees will rely on their 401(k) savings almost exclusively; especially when you consider that Social Security and Medicare continues to be underfunded and the chance these programs will become more robust in the years to come are slim to none.

One of the most corrosive effects on Americans' retirement savings has been their own behavior as they own investments through complete market cycles. According to DALBAR, over the last 20 years, the S&P 500 has delivered an annual average return of 8.3 percent, through the end of 2008. Yet, according DALBAR, the average investor in the funds returned approximately 1.8 percent. The economic consequences of that are significant; a $10,000 investment in the S&P 500 over that same 20 year span would have approached $45,000, but the individual investors account grew to approximately $14,000. That's not even keeping up with inflation. The rate of inflation change during that time was 82 percent.

This is predominately due to the average investor's emotional reaction to volatility in the equity markets. The average investor will only purchase a stock and after it has done well, and they tend to only sell when the investment has approached the trough of the investment cycle. Put simply, it's the reverse of the traditional adage of buy low, sell high. In fact, this may be the only industry that when goods and services are put on sale, people return the goods they bought at full price in exchange for the sale price that is now offered.

Americans who were planning on retiring this year looked at their assets, contemplated the lengthy life they still had to live and said, "I don't think I can do that now." People still expect to retire, it's just being pushed back. According to the Employee Benefit Research Institute's 2009 Retirement Confidence Survey, 28 percent of future retirees expected to postpone retirement, while 21 percent plan to work into their 70s today. Guaranteed income solutions, whether they are built into 401(k)s or managed accounts, or sold through annuities, will need to be a part of the solutions for those who don't want to outlive their savings.

Yes, an investment professional has been trained since their embryonic stages in the business to avoid the use of the word guarantees at all costs. However, over the last 10 years, the insurance industry has finally begun offering guaranteed living benefits that allow people to guarantee outcomes on their finances, it could be retirement income or it could be a specific amount in the future. For the first time, the insurance companies' clients didn't have to die for something good to happen to them. It was a brilliant marketing plan because it allowed for repeat business. More importantly, it gave people guarantees through one of the most violent investment periods in modern history.

These living benefits were considered to be expensive, complicated and unlikely to have any real economic value at the turn of the century because everyone was heavily invested in growth funds. All anyone wanted was the latest technology funds that were going to grow at 70 percent each year. Five or six or seven percent guarantees seemed anemic by comparison. Having been just through one of the strongest 10-year economic downturn in U.S. investment history, the American investor now may be seeking high-benefits and high-guarantee annuity solutions, which also happen to be high-cost, at precisely the time they probably need them the least.

The biggest concern our clients should have today is with "fee drag" of the cost of these benefits at a time they're probably not necessary. If stocks experience the typical reversion to the mean that occurs after most bad periods, the next period to come will likely to be much more benevolent than what we have just been through. That doesn't mean it's safe to invest with no insurance at all. Like most important irreplaceable assets, retirement future should not be left unsecured, but over insuring it is a complete waste of money. A reasonably-priced effective guarantee, that allows someone to assure their retirement income, may give the American retiree the greatest opportunity of achieving their retirement goals.

Will most Americans spend their latter years hitting a ball off a tee daily or gallivanting around the globe? Chances are slim that more than an elite set of the wealthiest can afford that scenario. However, educated investors who understand that a shift in retirement reality is occurring may be better equipped to end their career, yet still maintain a quality of life they've earned.

Back to Top



Stand-Alone Living Benefits emerge

Concept puts assets outside of annuities in play

by Tamiko Tolland

Tamiko Tolland is Managing Director of Retirement Income Consulting at New York-based Strategic Insight, an Asset International company. She can be reached at ttolland@sionline.com.

.

Americans need guaranteed retirement income, and the time is ripe for the insurance industry to come up with new ways of meeting retirees' needs. While we continue to see the evolution of existing products, we are now also seeing new ideas that add to the arsenal of choices for advisors and clients. One recent innovation is the marriage of the popular living benefit guarantees available on variable annuities (VAs) with either an individual mutual fund or managed accounts.

We have been tracking what we call the standalone living benefit (SALB) since its inception. Although it is new, it also leverages existing products. The primary advantage of the SALB is that it allows clients to purchase a living benefit guarantee on assets outside of an annuity, a structure that may be more advantageous for tax reasons or simply because of personal preference.

Many people like the idea of retaining complete control of the assets rather than having them remain within an annuity, although this freedom is limited if one wants to retain the full value of the guarantee. Furthermore, these contracts are sold completely separately from the guaranteed assets and therefore have no commission associated with them, though there is a fee, usually assessed quarterly.

The reason the SALB has real market potential because of powerful retirement demographics and trends that speak to an ever-growing pool of retirees in need of solutions. Retirement income needs are arriving at a critical juncture with the impending retirement of millions of Baby Boomers. Boomers are growing in number and as a percentage of the population. The U.S. Census Bureau projects that there will be 46 million Americans aged 65 and over by the end of 2010; by 2040, that figure will more than double to nearly 96 million.

In fact, the number of older Americans as a percentage of the overall population will increase rapidly and, as a percentage of the working aged population (18 to 65), will grow at an even faster pace. By 2040, current projections estimate that people aged 65 and over will constitute 35.3 percent of Americans of traditional working age. With our current pay-as-you-go Social Security system, the burden on younger workers of paying for benefits for retirees becomes overwhelming in the coming decades.

Even without uncertainty regarding the future of Social Security, the concept of "traditional" retirement is fading fast. Many Americans today face the need to engage in work in order to supplement other retirement income, either to support day-to-day needs or stretch future retirement dollars. However, even a dramatic shift towards extending work life will not alone address the challenge of meeting Baby Boomer retirement demands. On the contrary, it further stresses the need for innovative approaches to retirement income planning and deployment.

Like VAs, SALBs are registered with the SEC and the states and require both insurance and securities licenses in order to be sold. Many advisors who are interested in SALBs do not hold the licenses necessary to sell them, but some companies conduct the insurance transaction through a separate broker/dealer. It is expected that most advisors who plan on integrating SALBs into their business on a regular basis will ultimately get the appropriate licenses.

Generally speaking, the guarantees are similar to guaranteed lifetime withdrawal benefits found on VAs, though not as rich or complex as the mainstream offerings. So far, there is no approved SALB with a roll-up bonus; at best, we see annual step-ups. Also, there are few investment options and it may not be possible to switch from one portfolio to another. Pricing is based on the risk tolerance of the associated portfolio.

Each individual SALB contract is associated with a particular product partner, an asset manager, investment platform provider, or distributor. The alliance between the insurer and product partner is especially strong and goes beyond a simple distribution deal. However, availability of these products is limited more than it typically is with other retail investment or insurance products.

There are currently three insurers with products on the market, Genworth, Nationwide, and Phoenix. Allstate had introduced a guarantee associated with its new target date funds but discontinued both in June. Great-West Life recently filed for an SALB, and there are a number of other insurers that have filed for products that have not yet been approved by the SEC, including Allianz and Transamerica.

All of the SALBs that are currently available guarantee assets in managed accounts, mostly managed portfolios of mutual fund or ETFs. Nationwide has two different product offerings, one covering a selection of unified managed accounts with Citigroup/Smith Barney. Although it is certainly possible to attach the guarantee to individual mutual funds, this comes with different administrative challenges. Furthermore, with smaller account values in mutual funds than managed accounts, it is less appealing for many providers to start with this approach.

Although the idea of the SALB seems straightforward, the reality is that it is not so simple to take the living benefit from an annuity and apply it to other assets. For one thing, securing regulatory approval has not been seamless, and the New York State Insurance Department has explicitly forbidden these new products. Although a coalition of insurers is trying to introduce legislation to legitimize SALBs in New York, these efforts will take time.

It is also important to recognize that the risk management is much trickier because the assets are outside of the control of the insurer, even when they are managed by a subsidiary. Therefore, SALBs include contractual elements that cover the insurer in the event that the investment management strays outside of the boundaries of what the insurer can reasonably hedge.

Not surprisingly, contracts include clauses related both to policyholders' need to conform to certain requirements and the consequences of changes made by asset managers. Unlike VAs, where it is easy for insurers to control the allocation of assets and either prevent or be aware of violations of allocation requirements, the covered assets of SALB are fully under the control of the investor.

The SALB does not necessarily reduce the overall cost to the investor relative to a VA with a GLWB, but it serves as a valuable option that may be preferable to certain advisors and investors. Retirement income innovations are important, not because they replace existing solutions, but because they add to the choice available to the investing public.

Thus, we do not see the SALB replacing VAs; in fact, in our survey of broker/dealers, the prevailing opinion was that these new products are likely to drive more sales toward VAs, which generally offer more investment options and a richer guarantee.

We currently see the biggest impediment to the growth of SALBs is the appetite of insurers to take on more living benefit risk. The financial crisis has underscored the value of guarantees but also increased the cost and awareness of the need for meticulous risk management. This does not mean that SALBs will fail to thrive, but it does mean that, as we have observed so far, the industry will progress cautiously in this market.

Despite the perils and uncertainty created by recent economic instability, there is tremendous opportunity for insurers to gain new business and provide a valuable service to retirees. It is an exciting time to monitor the new ideas that are emerging and see the various ways that the industry seeks to meet the needs of advisors and their clients.

Back to Top



and the nominees are....

'RMDs' and the '70½ Tax Trap'

Strategies that can help high-income wage earners

by David G. Freitag, CLU, ChFC, CRPC

David G. Freitag, CLU, ChFC, CRPC, is Vice President at Impact Technologies Group. He can be reached at dave.freitag@impact-tech.com.

This year's Motion Picture Academy Award nominations will be announced on February 2, 2010 amidst glitz and glamour. For the first time in Oscar history, 10 movies will be nominated for Best Picture honors. It is also award season in the financial service industry for issues that affect retirees and people nearing retirement or age 70½. Based on the blitz of media exposure and press attention in the financial news, two of the leading, high-profile celebrity contenders for this year's top award in 2010 have to be:

For sure, these interrelated subjects of Roth Conversions and increasing tax rates will be on the red carpet as the nominees for best performance in a leading role. For many people, the new ability to convert traditional, qualified money balances into tax-free balances represents a tax diversification strategy, a tax shelter strategy and a gift-giving legacy strategy that must be considered.

Yet, for high income tax payers, perhaps more attention should be paid to the powerful, yet dark and sinister supporting role played by required minimum distributions (RMDs).

Dark role played by RMDs

RMDs have been well-documented requirements of traditional qualified retirement accounts for a long time. When considered in a vacuum, and particularly when assisted by software tools, they are easy to understand. The government does not want these tax-deferred accounts (Traditional IRAs, 401(k) and 403(b) plans) to escape income taxation after age 70½. Therefore, the IRS requires that the combined balances of traditional qualified retirement accounts be totaled together at age 70½. The aggregated account balance is then divided by a life expectancy formula. The result is the Required Minimum Distribution.

The RMD withdrawal payment can come from any of the traditional accounts if they are not aggregated into one holding account. For example, at age 70, the government life expectancy factor for most couples is 27.4. To calculate the RMD withdrawal, simply divide this factor into the balance of the combined accounts. If the account balances total $1,000,000, the RMD is $36,496 for that year.

For the higher income tax payer with $1,000,000 in qualified money, the $36,496 might not be a lifestyle altering number. However, consider the ramifications of a married couple with $3,000,000 in qualified money as they approach 70½. The $36,496 RMD becomes $109,489 in required distributions.

Furthermore, it is important to remember that this RMD force-out is imposed by the IRS every year after the required start date. (It was voided by Congress, for one year in 2009, due to the market collapse.) It is also critical to understand that Congress is not looking for less money in the future; rather it is looking for a great deal more. Real money is needed to pay for the war in Iraq and Afghanistan, to pay for the TARP program, to pay for the Cash for Clunkers program, to pay for the mortgage restructuring program, to pay for Medicare, to pay for Social Security and on and on.

Nasty tax trap lies in wait for high-income earners

As if directed by Alfred Hitchcock himself, the IRS has baited and set a nasty tax trap to snare the unsuspecting and unprepared high-income wage earners as they reach age 70½. At this point, the RMDs will force a successful couple into or near the top marginal tax brackets. In addition, large RMDs could expose up to 85 percent of their Social Security benefit to be subject to ordinary income taxes, taxable at the maximum marginal rate. The 70½ tax trap is easy to see graphically when illustrated in concert with pension income cash flows, Social Security payments and other post-retirement income payments. In the example below, the unsuspecting couple who will need $310,000 in income in 2014 to support their life style(see arrow on graph) will see their taxable income jump to over $419,000 in 2015 because they are forced to take the RMD after reaching age 70½.

If Congress allows the Bush tax cuts to expire at the end of 2010, the RMD of $109,489 will be taxed at the top marginal rate of 39.6 percent which would increase their underlying tax bill by $43,358. This higher tax bill is a conservative estimate because it does not consider any health insurance surtaxes or deficit-correcting higher income tax rates that may come in the future.

Three planning strategies for high income clients

Here is the good news. At least three proven planning strategies exist to help high-income wage earners mitigate the 70½ tax trap:

As a tax-diversification strategy, the presence of RMDs offers a powerful reason for higher-income wage earners to consider moving some portion of their qualified money into Roth IRA accounts. There are web calculators that may be generally helpful to illustrate this concept. However, in order to tailor your recommendations to a specific client's needs, a more comprehensive system may be needed. Be sure the analysis system can consider all sources of income for the client (like pensions, Social Security and the liquidation of non-qualified assets) that it can project income and asset growth into the future, and that it can graphically illustrate Roth Conversions so you can show the before and after impact of RMDs on your clients' plans for retirement income security. When these projections expose the 70½ tax trap, Roth conversions become increasingly meaningful and urgent. Roth IRA plans have no required minimum distributions so, by default, they can play a key role in a retirement tax diversification strategy.

A second strategy to make RMD payments tolerable is using them to buy new life insurance, especially if it is held in an irrevocable life insurance trust (ILIT). This is a sound strategy if the RMD payments are not required to support lifestyle needs in retirement. In the above example, $106,000 in RMD payments will buy a $3,150,000 permanent policy on a 70-year-old male in good health. The RMD payments are used as the source to pay the premiums. Income tax-free death benefits are paid to his family upon his death. This is a perfect way to systematically convert tax-toxic, qualified assets into tax-free life insurance death proceeds. It's also an effective technique to systematically remove tax-qualified assets from the client's estate. Placing the policy in an irrevocable life insurance trust may cause the policy's death benefits to avoid estate taxes as well. Again, when choosing software to illustrate this strategy for the client, be sure to look for tools that can illustrate income and estate tax consequences, as well as income in respect of a decedent (IRD) income tax ramifications.

The third strategy that might reduce RMD payments and avoid the 70½ tax trap is to simply start spending qualified assets well before age 70½. By holding the non-qualified assets in reserve and using taxable distributions earlier in retirement to support lifestyle needs, the client might be able to lower his/her RMD payments or eliminate them entirely. Although this option seems to run counter to accepted logic of �always defer taxes�, the presence of large or looming RMDs can change the game-plan rules.

Back to Top



Obama endorses self-reliance

Saving for retirement just got easier

by E. Thomas Foster Jr.

E. Thomas Foster Jr., Esq., is The Hartford's national spokesperson for qualified retirement plans. He can be reached at tom.foster@hartfordlife.com.

Earlier this year, when President Obama announced several new initiatives to make it easier for Americans to save for retirement, supporters in the retirement industry were ready to sing, "Hail to the Chief."

The great, noble call that President Obama made is to encourage Americans to become more self reliant when it comes to providing for their financial security in retirement.

"This recession has not only led to the loss of jobs, but also the loss of savings," President Obama said during his announcement, noting that Americans have lost about $2 trillion from their retirement accounts because of the economic downturn. He said he was proposing "several common-sense changes that will help families put away money for the future."

The Automatic Decision

Perhaps the most exciting idea that President Obama outlined is his administration's efforts to make it easier for businesses to automatically enroll employees in 401(k) programs. Instead of making 401(k) plans a benefit that a worker must opt into, businesses can automatically enroll employees into accounts at the date of hiring unless the worker opts out.

Automatic enrollment is already available in the retirement plan marketplace and has proven to be a highly effective way to encourage workers to participate in employer-sponsored retirement plans such as 401(k)s, governmental 457(b)s and 403(b)s. Employee participation in 401(k)s rises from 70 percent to 90 percent when plan participants are automatically enrolled, according to a White House fact sheet.

Auto enrollment may be the wave of the future, something that most employers will eventually embrace. And why not? Automatically enrolling employees into a retirement plan not only helps workers, it helps many employers as well. Automatic enrollment may help retirement plans pass nondiscrimination tests. Highly compensated employees, including business owners, may find it easier to accumulate assets for retirement because they have fewer concerns about whether or not lower-compensated employees are contributing enough to the plan to avoid discrimination issues.

There are some requirements, and some new opportunities. One of the requirements is that employees must be notified annually of the auto enrollment and they must have the opportunity to opt out. Other requirements vary based on whether or not the retirement plan includes an automatic contribution arrangement, an eligible automatic contribution arrangement or a qualified automatic contribution arrangement. The latter two arrangements were added by the Pension Protection Act of 2006.

On the opportunities front, defaulted employees can now withdraw their automatic contributions from the plan within 90 days from their first deferral. The withdrawals are permitted only for plans amended to include an eligible automatic contribution arrangement. Some plan designs may not allow employees to withdraw their deferrals, a point financial advisors and their clients should consider before implementing auto enrollment. Employees who opt out and withdraw their 401(k) contributions within the 90-day window may have to pay taxes on their pre-tax deferrals. However, the 10 percent federal tax penalty that typically applies to withdrawals before age 59½ of pre-tax deferrals is not applicable in this instance.

The President's initiative presents an outstanding opportunity for financial advisors to review the participation rates for their business clients' retirement plans. Non-discrimination tests are becoming an increasingly difficult hurdle for many employers. Unfortunately, this is happening with growing frequency. The 401(k) Profit Sharing Council of America (PSCA) reported that 58 percent of all non-safe harbor plans failed their non-discrimination test in 2008, an increase of 20 percent from the previous year. If your clients are struggling with this issue, it could be an opportune time to suggest employing automatic enrollment.

Saving Tax Refunds

Another positive idea announced by President Obama is the modification of tax forms by the Internal Revenue Service to allow federal tax refunds to be used to purchase savings bonds. Tax refunds, which the White House reports average more than $2,000 for more than 100 million families annually, have been viewed in the past by many people as "found money." Little thought may have been given to how to put it to good use.

The prevalence of sales flyers for flat-screen TVs, new cars and vacation packages during the spring tax return season provides some clues as to how at least some of this money is spent. Making it easy for taxpayers to save their tax refunds by purchasing a savings bond may put a damper on big screen TV sales but it could certainly give a boost to the savings rate.

Reach out to your clients early, before they head off with their tax refund to buy the latest and biggest flat-screen, and help them make a financially sound decision about their retirement.

Unused Sick and Vacation Days

Another potential source of retirement savings, the president pointed out, is the cash many employees receive for unused vacation or similar time off when they leave their jobs. In some instances, those payments are made to existing employees at the end of the year.

The administration has clarified the rules about workers putting pay for unused sick and vacation days into their employer's retirement account. This may prove to be a boon for some workers' retirement savings but implementing these changes creates some complexity for employers. They will have to determine how much time can be credited to a retirement account based on employee contributions, again being careful not to exceed current limitations. The federal government could further encourage retirement savings by waiving or relaxing some of the contribution limitations.

The Internal Revenue Service has issued two Revenue Rulings addressing this issue. The first ruling, Revenue Ruling 2009-31, addresses annual contributions of payments employees would receive for unused vacation or other similar leave to an ongoing defined contribution plan, whether as employer contributions or elective 401(k) contributions. A second ruling, Revenue Ruling 2009-32, addresses similar contributions at termination of employment. Reach out to your clients now, point out these new revenue rulings, and start a conversation about this opportunity.

News Rules Expected

The IRS has issued detailed rules addressing President Obama's retirement initiatives. The new revenue rulings and notices can be found at irs.gov. Financial advisors who take the time to review these new retirement savings initiatives will readily realize the tremendous opportunity they present to promote the importance of retirement planning as well as the benefits of sound financial planning. The president's initiatives provide yet another opportunity to help employers and their employees make the most of their retirement plans.

Financial advisors should work closely with clients who own or run businesses to help them better understand how the new rules can be applied and, in turn, help employees understand how they can boost their long-term retirement savings. This is definitely an education opportunity, one that should not be ignored.

According to research from The Hartford, one in three (34 percent) Americans say they have little or no understanding of their retirement plan and three in four (74 percent) say they have less than a complete understanding. Employers need to make sure the new rules are implemented correctly and communicated fully to employees.

But the opportunity for education goes beyond the new rules. Every financial advisor should offer to meet with retirement plan participants to conduct a "gap analysis" to determine how much each individual investor has accumulated for retirement, including assets within an employer-sponsored retirement plan, personal savings and investments, the value of their home and real estate, and any other assets they may have. The total value of those assets should then be compared to how much each person actually needs to reach his or her retirement goals. The difference or "gap" between these two calculations is often bigger than most people suspect.

A study by McKinsey & Co. in October verified this suspicion. McKinsey's "Retirement Index," which was widely reported in the media, found that the average American family faces a 37 percent shortfall on the income they will need in retirement � a savings gap of $250,000 per household at retirement. That "gap" takes into account expected payouts of Social Security, pensions and personal retirement savings from accounts such as 401(k)s and other retirement plans, according to McKinsey.

Reaching out to retirement plan participants will help uncover dozens of financial planning opportunities and can ultimately be a boon to any financial planning or wealth management practice.

Back to Top



It's 2010, do you know what your estate tax is?

by Herbert K. Daroff, J.D., CFP

Herb Daroff is associated with Baystate Financial Services in Boston. He is a contributing editor for LIFE&Health Advisor. Daroff can be reached at hdaroff@baystatefinancialplanning.com.

.

According to the law passed in June 2001, there will be no federal estate tax in 2010.

I remember speaking in Chicago the week after this law passed. The very first question I received was, "What specific planning changes should we make?" I said, "The health care declarations should indicate that in 2010, pull the plug." I then cautioned the group not to take any trips with their children during 2010, or at least be sure that they bought a round-trip ticket.

Now, on the eve of 2010, I think it is unlikely that the estate tax will be repealed for one year, or longer. The current bills in the House and Senate appear to continue the current $3,500,000 federal exemption into 2010. In 2011, that exemption could drop to $1,000,000 (or $1,300,000, the original $1,000,000 increased for inflation, just like the $10,000 annual gift exclusion has increased to $13,000).

One benefit to estate planning contained in these bills is the portability of the death exemption. Without portability, each spouse needs to own assets individually. Estate planners are constantly moving assets between spouse, or hoping for successful disclaimers in the nine months after the death of the first spouse to die. With portability, if one spouse dies with say $1,000,000 of assets, the surviving spouse would then have a $6,000,000 exemption.

RETIREMENT PLANNING

Under current law, in 2010, the income limit for making Roth Conversions is removed.

Tax professionals traditionally advise, "defer income and accelerate expenses." Given a choice of, "pay me now or pay me later," opt for later whenever taxes are involve

However, many planners and clients are anticipating the ability to pay their taxes now instead of later (deferring them). What? That seems quite counter-intuitive. It might be, except in an economic environment where we believe that income tax rates may be increasing.

The retirement paradigm, that you will be in a lower tax bracket when you retire, may be a myth for many taxpayers. Anticipating that during at least some of their retirement years they may be in a higher tax bracket than the current 35 percent, they plan to pay the taxes on some or all of their retirement savings now.

There may be one significant flaw in their thinking. The Congress has already talked about increasing the tax bracket for incomes over $250,000. Most people assume that the new top tax bracket will not adversely affect them. However, converting Traditional IRA assets to a Roth IRA results in additional taxable income. Unless the Congress specifically excludes the Roth Conversion income from the over $250,000 tax bracket, many more taxpayers will have income in that bracket.

Another concern is making sure that the taxpayer has sufficient assets outside of their retirement accounts to pay the tax bill. I presented a CPA seminar just after the October 15th filing date. They all experienced the same problem. Business owners did not have the cash flow to make the retirement plan contributions that they expected to make and therefore owed much more in taxes than originally anticipated. And, both business owners and individuals did not have the cash flow to pay the income tax bill.

Many plan to take advantage of the opportunity to shift the Roth Conversion taxes into 2011 and 2012. That may work to keep more out of the top brackets. However, remember, without an Act of Congress, the top income tax rate in 2011 will be 39.6 percent, not 35 percent, and we may also have that new tax bracket for income over $250,000.

INVESTMENT MARKETS

The mantra for 2009 was, "too big to fail." Obviously, we have no idea what the mantra will be for 2010.

The biggest planning failure for 2009 was not having funds in the stock market for the second and third quarters, which were very positive. Estimated billions of dollars rolled over from one CD to another CD in October at interest rates under five percent, and taxable.

The good news is that another estimated billions of dollars will be coming due in April 2010 (and again in October). Variable annuities with lifetime benefit riders can provide five percent or more tax deferred return for future income. Not a good idea for funds needed for liquidity.

Another advantage of these hedged returns for future income is that they enable investors to allocate larger portions of their retirement portfolios into volatile asset classes, such as small-cap and international. These funds have the potential for substantial returns. With the lifetime benefit riders, investors can reap the potential benefits with substantially lower risk.

LIFE INSURANCE

Life insurance death benefits provide replacement income. Many people look to reduce the amount of coverage as they increase their personal investment portfolios (hopefully considering the net after tax value of these accounts). People should also look to increase their life insurance protection when their investment portfolios are reduced, and/or when their income tax brackets are increased. Cash value held in life insurance policies operates like a Roth Look Alike account.

Term insurance plus a Roth (or 529) is Whole Life, Universal Life, or Variable Universal Life. After tax dollars accumulate without erosion due to taxes and are available tax-free (provided the policy does not lapse and that the life insurance policy does not become a modified endowment contract).

For 2010, be sure that you and your clients have four pools of assets:

Back to Top