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Retirement News & Products March 2009

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The Securities and Exchange Commission recently charged Merrill Lynch and two of its former investment advisor reps with securities fraud violations for misleading pension consulting clients about its money manager identification process and failing to disclose conflicts of interest when recommending them to use two of the firm’s affiliated services. Merrill Lynch has agreed to settle the SEC’s charges and pay a $1 million penalty.

According to the SEC’s order, “Merrill Lynch failed to disclose its conflicts of interest when recommending that clients use directed brokerage to pay hard dollar fees, whereby the clients directed their money managers to execute trades through Merrill Lynch.” These clients received credit for a portion of the commissions generated by these trades against the hard dollar fee owed for the advisory services provided by Merrill Lynch Consulting Services, the SEC found. “Consequently, Merrill Lynch and its investment advisor representatives could and often did receive significantly higher revenue if clients chose to use Merrill Lynch directed brokerage services,” the SEC order states. The SEC’s order finds that Merrill Lynch also failed to disclose a similar conflict of interest in recommending that clients use Merrill Lynch’s transition management desk. In addition, the SEC said that Merrill Lynch made misleading statements to the clients served by its Ponte Vedra South, Florida, office regarding the process used to identify new money managers to present to its clients…

New Cerulli Associates research finds that deferred variable annuities (VAs) show promise for the wealth transfer market, which Cerulli estimates will top $38 billion through 2035. According to Cerulli’s proprietary advisor survey examined in the Cerulli report, Wealth Transfer: Sizing, Trends, and Opportunities, 15% of respondents frequently use deferred VAs as part of their clients’ wealth transfer plans, and another 30% occasionally use them.

While industry experts attribute high levels of usage in part to the widespread expansion of guaranteed minimum withdrawal benefits (GMWBs) on deferred VAs, Cerulli notes that there has also been an increase in the use of annuities with spendthrift protection, both inside and outside of a trust. “A growing number of firms have reported to us that they see an increase in spendthrift concerns in the past several years,” states Lisa Plotnick, an associate director at Cerulli and co-author of the report.

“The older generation wants to protect the assets from what they call ‘the misuse of funds’ by the beneficiaries,” continues Plotnick. “There is also a concern about ensuring that assets are protected from ex-spouses, creditors, and a ‘litigious society,’ thereby keeping tax-deferred wealth within the family.”

Cerulli says there are two ways to accomplish spendthrift protection, either with spendthrift trusts or annuities with spendthrift positions. However, spendthrift trusts are typically used by those in the higher-net-worth population, and the need for wealth transfer products affects all wealth tiers. In fact, Cerulli finds that of clients served by active wealth transfer advisors, 24% have net worths less than $1 million.

If outside a trust, the annuity is set up in such a way that the benefit cannot be taken in a lump sum. Cerulli notes that it is also essential that a variable annuity satisfy the investment objectives of the beneficiaries after the wealth transfer event, particularly if the policy is not laden with guarantees…

New research by the Investment Company Institute found that seven in 10 U.S. households have some type of tax-advantaged retirement savings through work or through Individual Retirement Accounts (IRAs).

The study, The Role of IRAs in U.S. Households’ Saving for Retirement, 2008, found that 47 million, or 41%, of U.S. households reported owning IRAs in May 2008. The study also finds that rollovers from employer-sponsored retirement plans have fueled the growth in IRAs, and more than half of households owning traditional IRAs have rollover assets in them.


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