Jefferson Adds Alternative Investment Options

The Country Rotation Portfolio and Sector Rotation Portfolio from Innealta Capital have been added to Jefferson National’s offerings.

Innealta is a quantitative asset management firm specializing in the active management of exchange-traded fund (ETF) portfolios. Jefferson National is also offering funds with specialized risk management and hedging strategies: AllianceBernstein Dynamic Asset Allocation Portfolio, Lazard Retirement Multi-Asset Targeted Volatility Portfolio and the recently launched PIMCO Global Diversified Allocation Portfolio.

Other additions are a managed futures strategy from the Mariner Hyman Beck Portfolio, and the Vice Fund. With these new investment options, Jefferson National’s flat-fee variable annuity offers more than 70 liquid alternatives, including many strategies favored by hedge funds and institutional investors.

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The firm has continued adding alternative strategies to help advisers manage volatility while improving tax efficiency, according to Laurence Greenberg, president of Jefferson National. “As the threat of the fiscal cliff looms large and taxes are poised to rise, these needs become even more urgent,” Greenberg said. “Combining the industry’s most alternative strategies with the power of tax deferral, Jefferson National helps RIAs counter these challenging dynamics.”

Jefferson National’s research indicates that tax efficiency is vital to RIAs and fee-based advisers facing plunging markets and rising taxes. This month, the market staged the biggest drop in nearly a year and all indexes were down more than 2%—the worst post-election sell-off since 1948—as investors feared the long-term gridlock posed by the expiration of tax cuts on December 31.

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If no solution is reached by year-end, taxes will escalate by $500 billion, or an average of nearly $3,500 per household, according to the nonpartisan Tax Policy Center. The same study says the top 1% of households would see after-tax income drop by an average of 10.5%.

Greater allocation to alternatives is a growing trend, according to the firm’s research. More than 68% of advisers have increased their use of alternative investments, and more than 61% believe that alternatives will become even more important than traditional investments in the future.Data from Cerulli Associates indicates that in five years the use of alternative strategy funds could increase more than 245%.

“As the rest of the competition moves to re-price and re-tool in an ongoing features and benefits battle—or retreat from the industry entirely—Jefferson National will continue building momentum with unique alternatives in a tax-deferred investing solution tailored to meet the needs of RIAs and fee-based advisers,” Greenberg said.

Jefferson National provides tax-deferred investing solutions for RIAs and fee-based advisers.

To learn more, visit www.jeffnat.com.

Transparency of Liabilities a Growing Trend

The trend toward more transparency of plan assets and liabilities seems to be gathering momentum.

Since December 2010, companies like Honeywell, AT&T, Verizon Communications and UPS announced mark-to-market recognition in the corporate earnings statement of pension gains and losses, creating a more transparent representation of the economic cost of the pension plan in their income statements by marking to market their funded status immediately without smoothing. The U.S. Financial Accounting Standard Board (FASB) requires employers to recognize the full value of their funded status on balance sheets, with a deficit shown as a liability. The “new FAS 87” method increases the P&L cost immediately whereas “traditional FAS 87” increases P&L cost gradually through amortization.

These four corporations’ moves to mark-to-market accounting coincided with the International Financial Reporting Standards (IFRS), an initiative that simplifies the way pension income or loss is recognized by publicly traded companies outside the United States.

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Because it is in most companies’ interests to have a consistent approach to accounting, it seems that mark-to-market accounting will reach a tipping point, said Bob Collie, chief research strategist for Americas Institutional, Russell Investments, in research about the $20 billion club—Russell’s name for the 19 U.S. listed corporations with worldwide defined benefit pension liabilities in excess of $20 billion. If other companies follow suit, analysts will come to expect mark-to-market figures, he said.

“I don’t think it would take much for the trend to continue,” Collie told PLANSPONSOR, adding that the change in international accounting standards could prompt the U.S. to converge with this method.

However, some companies are hesitant to adopt mark-to-market accounting because of volatility, Collie added.

One of the biggest advantages of mark-to-market accounting is transparency, said Karin Franceries, executive director of J.P. Morgan’s Asset Management Strategy Group. “The simplification of accounting makes the link between the pension fund and plan sponsor clearer,” she added.

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The Impact of Accounting on Asset Allocation  

Accounting methods also have a direct impact on asset allocation. By using mark-to-market, it is easier to derive the impact of a company’s asset allocation because it is immediately translated in its pension cost, Franceries said.

Under the new FAS 87 accounting method, the expected return on assets is not reflected in the annual report. Without smoothing, the full impact of the deficit will show up on a company’s books immediately in the year it occurred. A higher deficit increase triggered by a riskier allocation would result directly in a greater loss, according to J.P. Morgan’s research paper, “The mark to market treadmill.”

Because reporting under the new FAS 87 method mirrors what is actually happening to a pension fund, it allows a CFO to focus on the economic reality of funded status.  Investment solutions that stabilize pension costs on the income statement under the new FAS 87 approach will be similar to those that stabilize liabilities on the balance sheet, the paper said.

J.P. Morgan’s paper provides a real-life case study showing what affect asset allocation would have on pension reporting.  The paper can be accessed here.  

Russell Investments’ research paper, “A busy pension year so far for the $20 billion club,” is available here.

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