IMHO: “Money Back” Guarantees

We’re seeing a renewed focus on retirement income of late, and for good reason.

 

Most participants seem barely able (or willing) to deal with the most rudimentary decisions about saving, much less investing those savings; and while the industry has developed tools and approaches to better their odds, IMHO, those challenges pale before that of crafting a workable, widely accepted, and readily implemented retirement income solution. 

Not that retirement income solutions don’t exist for participants.  Setting aside the long-standing availability (and viability) of “traditional” annuities, over the past several years, a number of innovative solutions have been brought to market.  Indeed, by my count, three more were introduced just last week. 

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 Clearly the market for such offerings is large, and getting larger by the day—and yet, despite a great deal of time, energy, expense, and focus, well, let’s just say that plan sponsors (still) seem as confused by the variety of choices in that arena as they were (mostly) oblivious to the distinctions in target-date fund structures.  And, quite frankly, they’re sceptical (if not downright cynical) in a way that they never were—but should have been, IMHO—about the ability of a fund complex to craft an investment allocation perfectly aligned with the needs of an individual’s retirement date.   

Most trying to “solve” the retirement income problem presume that we already have a workable, viable product available—we need only figure out better ways to get participants into “it”.  As a consequence, legislators (and some product providers) talk about things like “auto” annuitizing—the implementation of an annuity default for distributions to overcome resistance—while academics are inclined to focus on behavioral finance design modifications: better ways to “frame” or position the option, to “nudge” participants to make the “better” decision. 

At its simplest, an annuity is nothing more than an investor handing over money (or a stream of money) to an entity that promises, at some point in the future, to return it to the investor, ostensibly with some kind of return, above and beyond whatever fees are taken.  Consequently, at least in theory, a participant who has spent their working career saving for retirement should be able to take those savings and hand them to an entity that can return it over time as a retirement paycheck. 

But that remains a big step of faith for most, particularly in the wake of the financial crisis.  After all, who CAN, or should, you trust with that much money—literally your life’s savings?   

Don’t get me wrong—I’m encouraged by the new product developments, the interest of regulators in helping lay out a better course, the suggestions and insights of the academic community in fostering better plan designs, and the willingness of plan sponsors to keep an open mind.   

But ultimately, when it comes to spurring the widespread interest of participants, IMHO, the best product design will be one that offers them a “get your money back” guarantee (1).

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(1) Editor’s Note:  Let me attempt to stave off correspondence from the American Council of Life Insurers who, the last time I penned a column suggesting that participants might be a bit queasy about the notion of converting their savings into an annuity, wrote to assure me (and presumably all of us) that “The five trillion dollar life insurance industry, which alone can provide annuity contracts, remains a pillar of the nation’s financial system. While the effect of the nation’s economic downturn has been widespread, not one annuity owner has missed receiving annuity payments.” 

Madoff Trustee Complaint against J.P. Morgan Unsealed

The Trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (BLMIS) has announced that his complaint against JPMorgan Chase & Co., JPMorgan Chase Bank, N.A., J.P. Morgan Securities LLC and J.P. Morgan Securities Ltd. will be unsealed and made available to the public.

According to a press release put out by trustee Irving H. Picard, the complaint seeks to recover nearly $1 billion in fees and profits and an additional $5.4 billion in damages for JPMC’s decades-long role as BLMIS’s primary banker, aiding and abetting Madoff’s fraud. All recovered monies will be placed into the Customer Fund and distributed, pro rata, to BLMIS customers with valid claims.  

The 114-page complaint, which includes quotations from internal emails at the bank, contains substantial detail supporting allegations that JPMC knew or should have known that Madoff was likely engaging in fraud. “Incredibly, the bank’s top executives were warned in blunt terms about speculation that Madoff was running a Ponzi scheme, yet the bank appears to have been concerned only with protecting its own investments in BLMIS feeder funds,” said Deborah Renner, a partner at Baker & Hostetler, law firm for the trustee.

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The complaint alleges that JPMC had a palpable concern that Madoff was a fraud for years, but it was not until October 2008 that it reported Madoff to government officials. “Even then, JPMC executives did not restrict the BLMIS bank account, even though it was being used to launder money from the Ponzi scheme,” said Renner.  

The complaint says JPMC repeatedly allowed suspicious transactions for high dollar amounts to occur in the BLMIS account. In addition, JPMC had financial reports in its possession that clearly evidenced fraud.   

Picard initially filed the complaint under seal because JPMC had contended that information it had provided to the Trustee in the course of his investigation was confidential.   

“We have reached an agreement with opposing counsel to unseal a large majority of the complaint, with the exception of several allegations as well as the identities of the bank’s employees and customers,” Renner said in the announcement. “There is much more to come, in the way of documents and testimony, as we enter the discovery phase of the litigation. We will push for more information from JPMC in the course of the litigation so that the public can learn the full role of the bank in aiding and abetting Madoff’s Ponzi scheme.”

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