Data & Research October 26, 2016

Long-Term Care Insurance Solutions Lack Traction

A new analysis from Lincoln Financial Group and Zeldis Research suggests few are aware of the wide range of solutions available to help address the potential financial impact of long-term care.
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Lincoln Financial Group’s 2016 Long-Term Care Awareness Study, conducted by Zeldis Research, finds that the majority of people approaching retirement or in retirement have not taken any action to prepare for an “unanticipated long-term care event.”

The Lincoln study surveyed 500 people between the ages of 40 and 70, and found that of those with a financial advisor, only 45% have discussed the costs of long-term care with the adviser.

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“Few were aware of the wide range of solutions available to help address the potential financial impact of long-term care,” warns Mike Hamilton, vice president, MoneyGuard product management, Lincoln Financial Group. “More than one in two people turning 65 are expected to need long-term care in their lifetime, yet our research finds that those in their prime planning years are either not planning at all, or overlooking many of the options available in the market today that can address both long-term care expenses and other financial priorities.”

Long-term care can be an uncomfortable topic to discuss, he admits, but proper planning and understanding of the funding options available can make a big difference in maintaining control and confidence.

The Lincoln research shows that among those who have spoken with a financial adviser about long-term care, the most common resource discussed for addressing potential long-term care expenses is long-term care insurance (82%). Retirement savings are the second most common resource (61%), “which if used to cover expenses, can have a lasting negative impact on a surviving spouse or legacy plans.”

NEXT: Barriers to adoption persist 

“It’s estimated a consumer turning 65 today will incur on average $266,000 in long-term services and support costs, should they require future formal care, not accounting for inflation,” the study suggests. “Among the least discussed resources identified by the survey are hybrid products that combine long-term care benefits with a life insurance policy or an annuity. Hybrid products are rapidly gaining traction in the market and today outsell traditional long-term care insurance products.”

Lincoln found just 28% of those surveyed stated that they own a financial product that can help address potential long-term care expenses, and the top reasons for purchasing the product were to avoid depleting assets and for peace of mind, each cited by 92% of product owners respectively.

The Long-Term Care Awareness Study found that the primary barriers for purchasing a financial product to cover long-term care expenses are “competing financial priorities” and “concerns over paying for something that may never be used,”each reason cited by 57% of respondents. To ease these concerns, Lincoln points out that some types of long-term care coverage products are in fact “use it or lose it,” but many hybrid products are also available in the market today provide a benefit whether or not care is ever needed.

Of course, such a high-quality benefit will not come cheap, the research warns.

“A key component of long-term care planning is understanding the potential costs associated with the types of care one might need based on their state,” Lincoln concludes.

More information on the long-term care research and Lincoln Financial Group solutions is available here. 

The Markets October 26, 2016

DC Plans Could See More Smart Beta Approaches

Fee pressure in the DC industry is resulting in tailwinds for the expansion of the “strategic beta” asset class.
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Fee pressure is the dominant theme within the defined contribution industry, suggesting active investment managers may begin to focus more on smart-beta indexing over their traditionally preferred approaches to remain competitive.

This is according to the latest issue of The Cerulli Edge – U.S. Monthly Product Trends Edition, which concludes that DC plan advisers and sponsors are increasingly considering strategic beta as an alternative to traditional active management. Cerulli pegs the trend to a heightened focus on fees that has proven to be a boon for passive managers while simultaneously creating a significant headwind for their active counterparts.

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Cerulli data illustrates corporate defined contribution (DC) asset owners are adopting use of “strategic” or “smart” beta, with asset managers reporting that, on average, 11% of such products are available for corporate DC plans.

“The majority of product development has occurred within the ETF wrapper, a vehicle not as conducive to the DC space, especially within 401(k) plans,” Cerulli observes. “Asset managers that have strategic beta or are in the midst of developing strategic beta should not overlook the DC market as an area of opportunity to grow assets.”

To clarify an important definition, Cerulli notes that the catch-all terms “smart beta” or “strategic beta” simply refer to rules-based styles of strategic indexing that go beyond the traditional factors of market capitalization, momentum or value to build portfolios that seek to deliver market outperformance and better risk-adjusted returns. Unlike the “alpha” outperformance sought by tactical active managers, the outperformance of smart beta is supposed to come from the design of the index and pre-programmed trading rules.   

According to managers interviewed by Cerulli, concerns about lack of diversification of their market-cap-weighted passive strategies has institutional investors (including pensions and DC plans) thinking more about implementing strategic beta in their portfolios.

“The high cost of active strategies is also driving more institutions to strategic beta,” Cerulli says. “Many institutional investors have a collection of active managers with a neutral or conflicting set of exposures at the plan level. Adding strategic beta through a satellite position allows institutions to tilt plans toward a desired exposure.”

NEXT: Important facts about the smart beta market 

The Cerulli analysis goes on to suggest the impending Department of Labor (DOL) fiduciary rule may also accelerate the adoption of strategic beta on DC plan investment menus.

“In order to offer strategies that are in the best interest of their participants, DC sponsors may find themselves converging toward a middle ground,” the report explains. “Strategic beta can be an alternative choice to ensure DC sponsors are offering a product that can potentially provide alpha as well as protect against risk on the downside for a slightly higher fee than passive, but a lower cost than active.”

According to Cerulli, depending on the complexity of the strategy, strategic beta can cost on average anywhere between 25 bps and 50 bps.

“Exceptions to this include custom strategic beta where managers are charging upward of 50+ bps,” Cerulli warns.

The research firm “believes that in order to offer a robust product lineup that will satisfy the needs of best interest fiduciary standards to participants, sponsors should consider placing strategic beta into their menu offerings … In order for strategic beta adoption to succeed in DC plans, asset managers also need to ensure they educate plans sponsors about the methodology of strategies and the suitability of strategies in conjunction with their overall plan menu.”

Citing additional data from an FTSE Russell survey, Cerulli says more than one-third (36%) of investors prefer strategic beta products to be packaged as separate accounts. An additional 26% are interested in managing these products internally.

“The rest of asset owners polled prefer ETFs (11%), collective investment trusts (CITs) (14%), mutual funds (10%), and derivatives (3%),” Cerulli concludes.

More information on obtaining Cerulli Associates research is available online here. 

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