Date: Tuesday, April 26, 2005
To: CFDD Clients
Subject: Hancock Retirement Services: The Benchmark TPA Programs Are On A Roll & Inching Upmarket
Manulife Financial Corp (MFC) is a global provider
of financial protection and wealth management products and services, including
life insurance, long-term care, pension products, annuities and mutual funds.
On April 28, 2004, MFC
and John Hancock Financial Services completed the largest cross border merger
in Canadian history. The merger made MFC Canada’s largest life insurer,
largest financial services firm and largest public company.
Based on capitalization, the merger also created the 2nd
largest insurance company in North America
and the 5th largest insurance company worldwide.
MFC employs 21,000 people, distributes product through thousands of partners
and services millions of customers in 19 countries.
MFC reported a record $2.6 billion in shareholder earnings (Canadian)
for 2004, a 66% increase over the strong results reported in 2003. The
merger was primarily responsible for the earnings jump and book value per share
has increased by 45%, but mergers of this size generally produce some culture
shock.
Total assets under management were reported at $348 billion ($289 billion U.S.),
but $169 billion reflected general account assets. In other words,
segregated assets totaled a more modest $118 billion and mutual fund &
other assets totaled about $60 billion.
The U.S. units
include the U.S.
Protection Division and the Wealth Management Division.
U.S. Protection provides life and long-term care insurance products. The U.S.
Wealth Management Division provides group pensions, variable & fixed
annuities, 529 plans, mutual funds and institutional services.
The U.S. Protection Division contributed 18% of net income and accounted for
16% of the assets under management. The U.S.
Wealth Management Division contributed 16% of net income and accounted for 37%
of assets under management.
The U.S. Protection division holds a leading position in universal life, the
survivorship market and long-term care, both group & individual. The
Wealth Management Division is also the leading small plan 401(k) provider in
the 1-500 market and among the top 5 variable annuity & life providers.
MFC is among the highest rated insurers and the stock trades on the New
York, Toronto,
Hong Kong and Philippines Exchanges. The common
symbol is MFC on all the exchanges except Hong Kong.
The company now operates as Manulife Financial in Canada
and most of Asia and primarily through John Hancock in
the United States.
The merger may have benefited the company in other areas, but from a brand,
product and distribution standpoint, the impact on the U.S.
retirement services industry has been negligible. The change in brand has
also been viewed as neutral to date.
Management
Hancock is one of the best managed providers in the retirement plans
industry. As noted many times, success does not happen by accident
and hiring the right people, treating them well and
enhancing the role of business partners has paid dividends for Hancock.
The firm’s wholesaler force is widely recognized as the best in
their market segment and both advisors and sponsors are more than satisfied
with Hancock’s support and service. The firm also seems to be more
people oriented in recent years and many reporting, disclosure, website and
other deficiencies have been addressed since our last review.
The well-regarded Tom Bruns is the Chicago-based
Western Sales Manager and the Atlanta-based Bill Hicks is the Eastern Sales
Manager. Both are Divisional Vice Presidents with their own staff of Sales
Managers, Relationships Managers, Sales Support and Operations Managers.
Bruns and Hicks report to Peter Gordon, the
Atlanta-based Senior Vice President of Sales. Gordon reports to Jim
O’Malley, the Executive Vice President of John Hancock Group Pensions. In
addition to National Sales, O’Malley also oversees Marketing, Finance, Strategy
and Operations.
DC Plan Presence
Group annuities continue to account for 75% of the plans in the below $3
million market and about 50% of the plans with $3-10 million.
Group annuities should continue to dominate the small plan market and
it’s worth noting that Hancock is growing faster than “any” other provider
servicing 401(k) plans with 1-500 participants.
Hancock does not service 403(b), 457 or DB plans, but total DC plans sold
during 2004, mostly 401(k), were in excess of 5,200. The
5,200 plans contained about $3.9 billion and while the number of plans
sold were comparable to the prior year, assets increased by 18%.
The average plan sold had less than 50 participants and $1 million in
assets, but plans with 100-249 participants increased 12% and plans with
250-499 participants increased by 31%.
Total DC plans on the books were reported in excess of 30,000 (95%
k plans) and contained about $30 billion in assets and 1.3 million participants.
(Total plans in excess of 100 participants appear to be about 2,000).
In terms of plans, Hancock is the nation’s largest 401(k)
plan provider in the 1-500 market, but they are closely followed by
Principal and Nationwide. If 403(b), 457 and other DC plans were
included, the rankings would probably change. Principal’s sales slowed
last year, but they are working hard at righting the ship and ING has received
favorable rankings from a number of trade publications.
Hancock offers a number of retirement plan programs, but the “Retail”
Program accounts for about 80% of total sales. Approximately 40%
of total sales emanate from independents, 40% from the b-d channel (17% wirehouse) and 20% from producing TPAs.
Hancock’s unbundled programs are sold in conjunction with local TPAs and to avoid channel conflict, they will issue dual
proposals. Hancock uses the same pricing in the TPA proposals, but
producing TPAs could use revenue sharing to reduce
their administrative fees, thus undercutting advisor pricing.
Hancock micro manages their book of business, but not their people.
The firm generally defaults to the field and as a result, closing ratios are
high. The firm also keeps a close watch on Principal, their arch rival.
Hancock’s growth rate appears sustainable for the moment and the
firm’s sweet spot has traditionally been in the $50,000 to $3 million
market. However, as a result of a combined investment platform, expenses
are expected to be reduced by 10-20 bps for plans with $3 million or more and
Hancock’s sweet spot should expand to $5 million or more.
Hancock’s retention is high, but at some point they will have to shift from
aggressive sales growth to customer service and systems development work.
Advisors marketing less expensive programs will also be targeting annuity
programs that have experienced asset growth.
TPAs & The
Small Plan Market
Local support, service, enrollment and TPAs are
important to advisors that focus on the small plan market. Advisors also
have more control with a local TPA and Hancock is well established in the
TPA channel.
Partnerships with the TPA community should continue to grow because most
can’t afford to maintain daily valued recordkeeping systems. On the
other hand, TPAs need to limit their relationships
because it is not cost effective to learn the procedures and systems of every
vendor on the street.
Hancock is clearly TPA friendly and they offer a revenue sharing program
commonly used in all TPA service models, including American Funds, ING,
Principal and Hartford.
The firm also offers business evaluation service to their TPAs and Hancock’s electronic linkage, backroom efforts,
marketing, support and training are widely acknowledged as the benchmark for
small TPA Programs.
As noted, Hancock should continue to grow, but their growth will be
constrained to plans willing to work with a local TPA. Large plans
generally want a bundled solution and TPA programs become a tougher sale at
$10 million, but there is still a niche that values the local support and
flexibility that comes with a TPA.
Group Annuity Providers & The Small Plan
Market
We have already noted that group annuity providers
service 75% of the plans with less than $3 million and 50% of plans with $3-10
million.
There are always exceptions, but the insurance industry is generally better
at marketing than other financial service entities (banks are the worst).
The industry’s wholesalers are also skilled, their programs are flexible, local
support is available - including enrollment - and many enhance their partner’s
role.
Group annuity providers also have packaging advantages and given the
pressure on margins and the increasing burden associated with mutual fund
compliance, insurers could gain more “small” plan market share in the years
ahead. Those that gain market share must, however, enhance the value of
their partners.
Advisors continue to focus on lowering plan expenses, but group annuity
providers can charge more by offering more. No proprietary fund
requirement within a fixed menu of prudently selected funds, flexibility, sales
support, local presence and onsite enrollment are also selling points in the
small plan market, but sponsors must be willing to pay the freight.
Retirement Plans Group
Retirement Plan Programs
Hancock’s programs are limited to the DC plan market and include the Retail,
Venture, Venture B-D and Retirement Select Programs.
The Retail, Venture and Venture B-D Programs are unregistered group annuity
programs, but the Retirement Select is registered.
The Retail and Venture Programs are sold on a quasi-bundled basis. Hancock
provides the recordkeeping, but the administration, compliance and
documentation are provided by local TPAs. The
Retirement Select is also sold in conjunction with local TPAs,
but recordkeeping is outsourced to DST.
The Retail Program offers name brand mutual funds and the Venture Program
offers sub-advised funds. The Retirement Select offers some of the
registered sub-advised funds and alliance funds.
The Retail and Venture Program are sold with a wrap, but the Venture B-D
Program is available without a wrap at $1 million and the Retirement Select is sold
at NAV. The Retail and Venture Program offer dial-in commission
flexibility, but the Venture B-D and Retirement Select include fixed/bundled
commissions.
The Retail and Venture Programs require only five lives and $50,000 in first
year contributions, but the Retirement Select Requires $3 million. As
noted, the Venture B-D is available without a wrap at $1 million.
The average underlying expense ratio for the Retail Program was 1.13% at
year-end and 1.01% for the sub-advised Venture Program. The Venture B-D
and Retirement Select Programs can be sold at NAV and with bundled
commissions. As a result, their fund expenses are higher and range from
about 1.35% - 1.45%.
Investment Menu
Unlike the Venture and the Venture B-D Program (average expense ratio of
1.35%, bundled commissions & no wrap at $1 million), the “Retail” Program
offers a menu of name brand retail mutual funds rather than a sub-advised
menu. As noted already, the Retail Program is capturing about 80% of
Hancock’s new sales.
The menu includes about 80 funds from 28 families, including 5 American
“R-3” funds, numerous name brand “A” shares, 2 Hancock mutual funds, 10 MFC
Global Investment Management Funds and 5 Manulife
Managed Lifestyle Funds.
The Hancock Lifestyle funds are used by 60% of the
participants and are the third largest group of Lifestyle funds behind Fidelity
and Vanguard. The firm’s multi-manager approach is unique and includes
all major asset classes. Alternatives such as international small caps,
natural resources, REIT, TIPS, global bonds and high yield are also used.
A 0.10–0.20bps expense reduction is expected for plans over $3
million, but the average non-weighted expense ratio of the 80 fund menu after
administrative maintenance charges, but “before” any contract asset charges,
was 1.13% at year-end.
The average expense ratio was 1.23% for the 24 Aggressive Growth Funds,
1.14% for the 30 Growth Funds, 1.05% for the 11 Growth & Income Funds,
1.05% for the 7 Income Funds and 1.17% for the 5 Lifestyle Funds.
The Money Market Funds (2) averaged about 0.60% and the Morgan Stanley
Stable Value Fund incurred a 0.95% expense ratio.
All the funds are included in base pricing and the program menu is
offered with open architecture, i.e., proprietary fund requirements do not
apply. The program is also free of GIC fund requirements and as
noted, a pooled GIC type fund is offered as an alternative to the dated and
non-competitive general account option.
Overt costs, threshold requirements, NAV requirements and CDSCs do not apply to any of the funds (assuming no market
value makeup), but prospectus short-term redemption fees may apply.
The menu has delivered above average performance and Hancock has also
received Standard & Poor’s “Quality Evaluation” certification based on
investment selection and monitoring.
A TruSource (Union Bank Of California purchased
CNA Trust) brokerage option, a rebalancing service, passive trustee services
from Wilmington Trust Co. and online advice from mPower
Advisors, an indirect subsidiary of Morningstar Associates, are also available.
TruSource is the custodian for all brokerage
account assets and it’s important to note that they do not limit the plan to a
default brokerage provider or a certain number of outside brokers. In addition
to the multi source broker capabilities, the TruSource
option also allows for the investment in asset classes not normally offered by
other SDBA providers.
PRICING & COMPENSATION
The Retail and Venture Programs are unregistered group annuities sold in
conjunction with local TPAs.
The Retail and Venture Programs are wrap programs with dial-in commission
flexibility, but the Venture B-D is sold at NAV to plans over $1 million.
The Venture B-D also includes a standard commission option.
So, in addition to the underlying fund expenses, the Retail and Venture
programs are subject to wrap fees. Plans below $1 million would also
incur additional fees and TPA fees would apply to all the programs.
A reasonable estimate for TPA fees would include a $1,000-$1,500 base fee
and $15-$25 per-participant fees. The per-participant fees would
decline with case size, but are unlikely to drop below $10 per-participant.
Additional fees would apply to the optional trustee services, online advice
and the brokerage option. CDSCs and commission
recovery do not, however, apply to any of the programs.
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Retail
Assuming a $1 million plan with 100 participants, the Retail Program would
price out with a total investment expense of 2.08% when teamed with a first
year finders’ fee of 1.00% and a 13th month equalized trail of
0.50%. The 2.08% expense includes an average underlying fund expense of
1.13% and a 0.95% wrap.
If the commissions were reduced to a 0.50% finders’ fee and a 0.25% trail,
the investment related expenses would drop to 1.76%.
A $5 million Retail plan with a first year finders’ fee of 0.50%
and a 0.25% 13th month equalized trail would price out at 1.34%
and a $12 million plan would price out at 1.23%.
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Venture
A $1 million plan with 100 participants would price out with a total
investment expense of 1.60% when teamed with a first year finders’ fee of 1.00%
and a 13th month equalized trail of 0.50%. The 1.60% expense
includes an average underlying fund expense of 1.01% and a 0.59% wrap.
If the commissions were reduced to a 0.50% finders’ fee and a 0.25% trail,
the investment related expenses would drop to 1.30%.
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Venture B-D
When teamed with the standard commission option, the recently approved
expense reduction really benefits the NAV Venture B-D Program above $3 million.
In other words, a $5 million plan with 200 participants would price
out with a total investment expense of 1.38% and include a 1.00% first year
finders’ fee, a 0.50% ongoing finders’ fee and a 13th month 0.35%
equalized trail. An alternative option would include no finders’ fee and
an immediate 0.47% trail.
As you can see, a 0.47% immediate trail funded with a total
investment related expense of 1.38% is quite competitive.
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When evaluating the aforementioned pricing, it’s important to note that it
includes open architecture, above average performance, noteworthy sales
support, solid customer service, local presence, liberal onsite enrollment, a
relationship manager at $3 million and a strong education/communications
package.
Summary
The merger between Manulife Financial and John
Hancock created a large, financially strong and growing financial services
firm.
The former U.S. Manulife Retirement Services is
now known as John Hancock Retirement Plan Services. The brand changed,
but the people and products remained the same. To date, the retirement
industry has viewed the firm’s name change as neutral, but we would have
kept a “formerly Manulife” component.
The firm benefits from good management, scale, profitability and
multi-channel distribution. Hancock is also sales & marketing
savvy and they have been growing faster than their competitors.
The well-managed Hancock is a dominant small plan 401(k) provider and
they market unbundled group annuity programs, both wrap & NAV, in
conjunction with the TPA community.
The firm is committed to the retirement plans market, advisor-sold
distribution and their wholesaler force is widely recognized as the best in the
small plan market. Hancock’s sales skills definitely help advisors
close small plan deals, but a total package, local presence, good
communication/education capabilities and liberal onsite enrollment have also
helped the firm capture business.
The firm ranks well in surveys and Hancock is further distinguished by
offering relationship managers to plans with only $3 million.
Hancock closed over 5,000 401(k) plans in 2004, but the average sale was
less than $1 million. Hancock is, however, inching upmarket and the expected expense reduction should move the
firm’s sweet spot from $50,000 - $3 million up to $5 million or more.
The website, enrollment kits, communication material, participant
statements, fund manager due diligence and videos are the same for the Retail
and Venture Programs. Both programs also offer unbundled commission
flexibility, but the cost structures are different, i.e., the Retail Program
invests in mutual funds and the Venture Programs invest in sub-advised funds.
The Retail Program offers a prudently selected 80 fund menu from 28
families, mostly “A” and “R-3” type shares. As noted, wrap fees apply,
but the average non-weighted expense ratio was a competitive 1.13% at year-end.
The menu is offered with open architecture and proprietary fund
requirements, including GIC fund requirements, do not apply. A pooled GIC
type fund and multiple source brokerage are also
available.
Neither plan nor prospectus CDSCs apply, but fund
imposed short-term redemption fees, asset charges and
TPA fees do apply. The mutual funds based Retail Program is also free
of commission tracking issues which is something Hancock should be
communicating more aggressively.
Conclusion
Group annuity providers should maintain market share in the small plan
market and more TPAs are expected to partner with recordkeepers.
TPAs and advisors that focus on the small plan
market also prefer total solutions and providers that make it easy for them to
conduct business. As a result, Hancock’s growth should continue
because they are doing all the right things in their targeted market.
The expected expense reduction should help Hancock move upmarket
a bit, but wrap type group annuity programs sold in conjunction with local TPAs become a tougher sell at $10 million.
The sub-advised Venture Programs are more competitive than the mutual
funds-based Retail Program under $2 million, but the Retail Program should
continue to dominate sales to larger plans.
Given Hancock’s continued growth, the firm would, however, be wise to focus
on maintaining business, customer service and systems development.
To preclude cannibalization of their existing book, we would also be more
aggressive with expense credits for plans that have accumulated
assets.
Hancock may already be on top of this because they appear to have a number
of retention initiatives underway, including reduced pricing for their existing
business.
We would also scrap the antiquated general account fixed option as soon as
possible, eliminate all funds with short-term redemption fees, develop a new
proposal and identify all supporting literature by program name.
Equally as important, we would develop a rollover strategy, a cross-selling
initiative, a bonus program for advisors (commissions or pricing credits), tune
the TPA sales strategy for larger plans and commit major resources to the annuitization of participant assets.
Few realize it, but this is an opportune time to transfer risk and annuitization is a natural market for insurers. Annuitization may also be the only efficient and permanent
solution to the leaky rollover bucket.
Expanding the successful TPA business evaluation service to
cover advisors also makes sense.
Hancock may already be on top of the business evaluation service
because Tom Bruns (Divisional Sales VP
for Hancock) and Bob Ossey (Business Health Partner)
will provide cutting edge advice at the CFDD’s
October 4-6 Advisor Conference on how advisors can build valuable, profitable,
sustainable and relevant practices.
Advisors that participate in the “Business Health Check” breakout session
will be presented with benchmarks, market trends, marketing ideas and business
structures that maximize the value of advisory practices and monetize the
investment.
Hancock is also hosting a wraparound fiduciary training session with Don Trone and advisors that want more information on the
conference, “How To Grow Your Retirement Plans Business Part III:
Marketing Advisory Services Instead Of Product”, should go to http://www.401kduediligence.com/CFDDconference2005.asp
In summary, Hancock offers a total solution and they make it easy for their
partners to conduct business. The mutual funds-based Retail Program is,
however, not cheap below $2 million, but it is quite competitive from $5-10
million.
The sub-advised Venture Programs are more competitive than the Retail
Program below $2 million and as noted by some in the CFDD’s
network, the Venture B-D Program may be the most competitive NAV type group
annuity product available in the $5 million market.
The expense reduction has made the Venture B-D Program extremely attractive
over $3 million and advisors would be wise to request proposals on all
Hancock’s programs for comparison purposes.
Restricted and confidential. Not
to be duplicated or distributed.
ã
Copyright 1999-2004 Center for Due Diligence. All rights
reserved. This information has been taken from sources believed reliable,
but accuracy and completeness cannot be guaranteed. The information is
for broker-dealer use only and should not be construed as an offer to buy or
sell securities or any other investment.
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