The Markets April 15, 2013

Participant Accounts See Little Movement in March

Most defined contribution plan participants were content to stay put with their investments in March, according to the Aon Hewitt 401(k) Index.
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Transfers averaged 0.026% of total balances daily—just above the trailing 12-month average at 0.025%, and March had only three days with transfer activity above normal total net transfer activity in March was moderate, totaling $345 million or 0.24% of total participant balances.   

However, for the first quarter, total net transfer activity was among the highest quarters on record. In total, $1.19 billion moved into diversified equities, which is the largest quarterly dollar reported by the Aon Hewitt 401(k) Index (1997 inception). As a percent of total participant balances, the quarter totaled 0.88%—the highest since the current bull market began in the second quarter of 2009.  

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Net daily transfers favored fixed-income funds for 35% of trading days in March, compared with 63% in February. Transfers into diversified equities (equity excluding company stock) asset classes totaled $277 million of total flows or 0.20% of total assets, up significantly from 0.06%.

Similar to February, March total net outflows were heavily concentrated among two asset classes: company stock funds, losing $175 million (51%), and bond funds, losing $155 million (45%). In addition, GIC/stable value and international funds lost $10 million (3%) and $4 million (1%), respectively.  

Net inflows for most asset classes were reported this month. The largest inflows were in large U.S. equity funds, which gained $128 million (37%), followed by premixed funds with $108 million (31%) and small U.S. equity with $62 million (18%).  

Another measure of participant sentiment, employee discretionary contributions, shows participants increased their equity allocations to 64.0% in March, up from 63.4% in February. In addition, fueled by the rising market, participants’ overall equity allocation reached 61.8%, compared with 61.1% at the end of February—the highest equity allocation recorded by the Aon Hewitt 401(k) Index in nearly two years.  

More information is here.

Products April 15, 2013

Lower Annuity Premiums for Gen Y, Gen X

New York Life lowered the initial premium payment for its Guaranteed Future Income Annuity (GFIA), from $10,000, to $5,000.
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The change allows those who fund their IRA annually to use their contribution to create retirement income. The lower cost, aimed at individuals in their 20s, 30s and 40s, gives them the opportunity to create what New York Life calls “a pension-like stream of income within an IRA (individual retirement account).” 

The Guaranteed Future Income Annuity (GFIA) established a market in retirement income for pre-retirees to turn retirement assets into a lifetime income stream, according to Matt Grove, senior managing director of New York Life. “We believe this new lower initial premium payment will open up this proven way to fund retirement to Gen X’ers and Gen Y’ers who may already be making regular IRA contributions,” Grove said.

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GFIA is funded through contributions to an IRA to combine the tax benefits of this account with the pension-like guaranteed lifetime income of an income annuity, according to Grove.

Younger workers are the least likely to have a defined benefit (DB) plan. In 2010, only 9.6% of family heads under age 45 working in the private sector had a DB plan. For those without a DB plan, contributing the maximum to their IRA each year is a prudent financial step because it can reduce taxable income while helping prepare for financial needs in retirement.

A 37-year-old male can purchase a GFIA with a $5,000 IRA contribution and continue to contribute $5,000 annually. When he retires at age 67, he will receive over $19,000 annually for the rest of his life. If a 27-year-old male makes annual $5,000 IRA contributions to a GFIA, at age 67 he will receive more than $33,000 a year for the rest of his life.

In 2013, the maximum dollar amount that can be put into an IRA each year increased, from $5,000 in 2012, to $5,500. The maximum amount increases with inflation, so GFIA policyholders have the potential to purchase even more retirement income over time.

More information is at New York Life’s website.

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