U.S. patent application number 13/764392 was filed with the patent office on 2014-05-01 for equity-indexed annuity for group savings programs.
The applicant listed for this patent is Christopher O'Flinn, Felix Schirripa. Invention is credited to Christopher O'Flinn, Felix Schirripa.
Application Number | 20140122131 13/764392 |
Document ID | / |
Family ID | 37758074 |
Filed Date | 2014-05-01 |
United States Patent
Application |
20140122131 |
Kind Code |
A1 |
O'Flinn; Christopher ; et
al. |
May 1, 2014 |
EQUITY-INDEXED ANNUITY FOR GROUP SAVINGS PROGRAMS
Abstract
A Group Equity-Indexed Annuity (GEIA) with a guaranteed minimum
equity related return for a set of individuals are provided. An
algorithm sets a "participation rate" of a GEIA contract as well as
the carrier margin, risk and opportunity for recovery. The carrier
is held accountable to the participation rate produced by the model
investment portfolio in the formula and subject to the guaranteed
minimum. The selection of the participation rate is entirely
visible to a GEIA contract-holder. A "hedge budget" is based on a
formula-driven amortization process that blends old and new money.
Underlying assets are also managed to a "constant" duration, such
as the duration of a bond index selected by the GEIA
contract-holder.
Inventors: |
O'Flinn; Christopher;
(Potomac, MD) ; Schirripa; Felix; (Colts Neck,
NJ) |
|
Applicant: |
Name |
City |
State |
Country |
Type |
O'Flinn; Christopher
Schirripa; Felix |
Potomac
Colts Neck |
MD
NJ |
US
US |
|
|
Family ID: |
37758074 |
Appl. No.: |
13/764392 |
Filed: |
February 11, 2013 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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12901174 |
Oct 8, 2010 |
8392309 |
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13764392 |
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11455785 |
Jun 20, 2006 |
7813985 |
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12901174 |
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60708369 |
Aug 16, 2005 |
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Current U.S.
Class: |
705/4 |
Current CPC
Class: |
G06Q 40/00 20130101;
G06Q 40/06 20130101; G06Q 40/04 20130101; G06Q 40/08 20130101; G06Q
40/10 20130101 |
Class at
Publication: |
705/4 |
International
Class: |
G06Q 40/06 20120101
G06Q040/06 |
Claims
1. A method, implemented on a computer, for implementing a Group
Equity-Indexed Annuity (GEIA) with a guaranteed minimum equity
related return for a plurality of participants, the method
comprising: obtaining a first set of calls on equity index using a
first portion of a first contribution provided by a plurality of
participants; obtaining a first set of securities using a second
portion of the first contribution; determining that a first
specified period of time has elapsed; calculating, employing a
computer processor of the computer, a first participation rate
based on a model investment portfolio; determining if the first
calculated participation rate exceeds a minimum participation rate;
and if so, crediting interest to the first contribution in an
amount at least equal to the first calculated participation rate
multiplied by an increase in the equity index for the first
specified period, otherwise, crediting interest to the first
contribution in an amount equal to the minimum participation rate
multiplied by the increase in the equity index for the first
specified period.
2. The method of claim 1, further comprising obtaining a second set
of calls on equity index using the first portion of the first
contribution and a second portion of a second contribution provided
by a second plurality of participants.
3. The method of claim 2, further comprising obtaining a seeond set
of securities using a second portion of the second
contribution.
4. The method of claim 3, further comprising determining that a
second specified period of time has elapsed; calculating, employing
the computer processor of the computer, a second participation rate
based on the model investment portfolio; determining if the second
calculated participation rate exceeds a minimum participation rate;
and if so, crediting, interest to the first contribution and the
second contribution combined in an amount at least equal to the
second calculated participation rate multiplied by an increase in
the equity index for the second specified period, otherwise,
crediting interest to the first contribution and the second
contribution combined in an amount equal to the minimum
participation rate multiplied by an increase in the equity index
for the second specified period.
5. The method of claim 1, further comprising depositing the first
set of funds in an account insulated from other funds.
6. The method of claim 1, wherein the first portion of the funds is
equivalent to an expected interest on the set of securities.
7. The method of claim 1, wherein the type of the set of securities
is one of: a note and a bond.
8. The method of claim 1, wherein calculating the participation
rate further comprises implementing a mathematical algorithm to
calculate the participation rate.
9. The method of claim 1, further comprising electronically
receiving the set of funds from the set of participants.
10. The method of claim 9, wherein the set of participants are
employees of an organization sponsoring an employee savings
plan.
11. A computer-based system for implementing an Equity-Indexed
Annuity (EIA) with a guaranteed minimum equity related return for a
set of individuals, the computer-based system comprising: a
processor operable to execute computer program instructions; and a
memory operable to store computer program instructions executable
by the processor, for performing the steps of: obtaining a first
set of calls on equity index using a first portion of a first
contribution provided by a plurality of participants; obtaining a
first set of securities using a second portion of the first
contribution; determining that a first specified period of time has
elapsed; calculating, employing a computer processor of the
computer, a first participation rate based on a model investment
portfolio; determining if the first calculated participation rate
exceeds a minimum participation rate; and if so, crediting interest
to the first contribution in an amount at least equal to the first
calculated participation rate multiplied by an increase in the
equity index for the first specified period, otherwise, crediting
interest to the first contribution in an amount equal to the
minimum participation rate multiplied by the increase in the equity
index for the first specified period.
12. The system of claim 11, further comprising obtaining a second
set of calls on equity index using the first portion of the first
contribution, and a second portion of a second contribution
provided by a second plurality of participants.
13. The system of claim 12, further comprising obtaining a second
set of securities using a second portion of the second
contribution.
14. The system of claim 13, further comprising determining that a
second specified period of time has elapsed; calculating, employing
the computer processor of the computer, a second participation rate
based on the model investment portfolio; determining if the second
calculated participation rate exceeds a minimum participation rate;
and if so, crediting interest to the first contribution and the
second contribution combined in an amount at least equal to the
second calculated participation rate multiplied by an increase in
the equity index for the second specified period, otherwise,
crediting interest to the first contribution and the second
contribution combined in an amount equal to the minimum
participation rate multiplied by an increase in the equity index
for the second specified period.
15. The system of claim 11, further comprising the memory operable
to store computer program instructions executable by the processor,
for performing the step of depositing the set of funds in an
account insulated from other funds.
16. The system of claim 11, wherein the first portion of the funds
is equivalent to an expected interest on the set of securities.
17. The system of claim 11, wherein the type of the set of
securities is one of: a note and a bond.
18. The system of claim 11, wherein calculating the participation
rate further comprises computer program instructions for
implementing a mathematical algorithm to calculate the
participation rate.
19. The system of claim 11, further comprising the memory operable
to store computer program instructions executable by the processor,
for performing the step of receiving the set of funds from the set
of participants.
20. The system of claim 19, wherein the set of participants are
employees of an organization sponsoring an employee savings
plan.
21. A computer program product for implementing an Equity-Indexed
Annuity (EIA) with a guaranteed minimum equity related return for a
set of individuals, the computer-based system comprising: a
computer readable medium; computer program instructions, recorded
on the computer readable medium, executable by a processor, for
performing the steps of obtaining a first set of calls on equity
index using a first portion of funds from a first set of funds
provided by a set of participants; obtaining a first set of
securities using a second portion of funds from the first set of
funds; determining that a first specified period of time has
elapsed; calculating, employing a computer processor of the
computer, a first participation rate based on a model investment
portfolio; determining if the first calculated participation rate
exceeds a minimum participation rate; and if so, crediting interest
to the first set of funds in an amount at least equal to the first
calculated participation rate multiplied by an increase in the
equity index for the first specified period, otherwise, crediting
interest to the first set of funds in an amount equal to the
minimum participation rate multiplied by the increase in the equity
index for the first specified period.
22. The computer program product of claim 21, further comprising
obtaining a second set of calls on equity index using the first
portion of funds from the first set of funds and a second portion
of funds from a second set of funds provided by a set of
participants.
23. The computer program product of claim 22, further comprising
obtaining a second set of securities using a second portion of
funds from the second set of funds.
24. The computer program product of claim 23, further comprising
determining that a second specified period of time has elapsed;
calculating, employing the computer processor of the computer, a
second participation rate based on the model investment portfolio;
determining if the second calculated participation rate exceeds a
minimum participation rate; and if so, crediting interest to the
first set of funds and the second set of funds combined in an
amount at least equal to the second calculated participation rate
multiplied by an increase in the equity index for the second
specified period, otherwise, crediting interest to the first set of
funds and the second set of funds combined in an amount equal to
the minimum participation rate multiplied by an increase in the
equity index for the second specified period.
25. The computer program product of claim 21, further comprising
the memory operable to store computer program instructions
executable by the processor, for performing the step of depositing
the set of funds in an account insulated from other funds.
26. The computer program product of claim 21, wherein the first
portion of the funds is equivalent to an expected interest on the
set of securities.
27. The computer program product of claim 21, wherein the type of
the set of securities is one of: a note and a bond.
28. The computer program product of claim 21, wherein calculating
the participation rate further comprises computer program
instructions for implementing a mathematical algorithm to calculate
the participation rate.
29. The system of claim 21, further comprising the memory operable
to store computer program instructions executable by the processor,
for performing the step of receiving the set of funds from the set
of participants.
30. The computer program product of claim 29, wherein the set of
participants are employees of an organization sponsoring an
employee savings plan.
31. A method of developing a participant GEIA account value for a
participant of a GEIA contract comprising: determining whether the
participant is a new participant; if so, depositing an initial
contribution of funds into the GEIA account of GEIA contact
corresponding to the date of the initial contribution; otherwise,
determining whether an anniversary date of the GEIA account has
arrived; if so, obtaining a withdrawal request from the
participant, if any, allocating additional contribution from the
participant, identifying change in a standard equity index during
the preceding anniversary year, bonus interest, calculate index
interest factor and the participant's account value for the GEIA
account, otherwise, determining if a withdrawal request has been
made.
Description
CROSS REFERENCE TO RELATED APPLICATIONS
[0001] This application is a divisional of U.S. patent application
Ser. No. 12/901,174, filed on Oct. 8, 2010, now U.S. Pat. No.
8,392,309, which is a continuation of U.S. patent application Ser.
No. 11/455,785, filed on Jun. 20, 2006, now U.S. Pat. No.
7,813,985, which claims priority to U.S. Provisional Application
No. 60/708,369, filed on Aug. 16, 2005, which is incorporated by
reference in its entirety.
BACKGROUND OF THE INVENTION
[0002] 1. Field of the Invention
[0003] The present invention relates to a design computer
implemented method, a computer-based system, and computer product
for the design and operation of an investment contract or an
insured annuity contract that credits interest on principal in a
manner relating to equity returns while offering protection of
principal. More particularly, the present invention relates to a
computer implemented method, computer-based system, and computer
program product for creating and implementing a Group
Equity-Indexed Annuity (GEIA) with a guaranteed minimum equity
related return for a set of participants in 401(k) plans and other
tax qualified and non-qualified group savings arrangements.
[0004] 2. Description of the Prior Art
[0005] Various types of investment vehicles are available to
individuals including, but not limited to, stocks, bonds, real
estate, commodities, annuities and mutual funds. Each of these
investment vehicles yields the investor a given combination rate of
return and level of risk. While young investors can tolerate a
higher level of risk in their retirement savings accounts since
they have many years to recover from losses, retired individuals
and individuals near retirement have a lower risk tolerance. This
is because principal on which they are relying to recover from an
investment loss is being constantly depleted for living expenses.
The future income plans of individuals in or near retirement can be
critically disrupted by even modest investment losses. Accordingly,
retirees and individuals near retirement need to minimize or avoid
investment losses.
[0006] A type of fixed annuity contract currently available to
individuals, called an Equity-Indexed Annuity (annual ratchet
type), addresses this problem. The individual EIA contract provides
a guarantee of principal plus interest, at least equal to the
requirements imposed by the state insurance Standard Non-Forfeiture
Law, while also promising alternative interest credits equal to a
percentage of the increase (i.e., positive change) in a standard
equity index, like the S&P 500 without dividends (S&P). As
a result, an individual annual ratchet type EIA contract delivers
equity related returns while offering protection of principal and
guaranteed interest. Very high loads and carrier discretion over
benefits (i.e., interest crediting) currently characterize the
individual EIA contracts available in the retail marketplace.
[0007] The individual EIAs that exist in the retail market (e.g.,
those sold to individuals by agents and brokers) are designed with
various features. The impact that these features have on interest
credits, minimum guarantees, loads, and liquidity (i.e., the
ability to make penalty-free withdrawals) will utimately drive
customer satisfaction or dissatisfaction. Aside from the minimum
interest guarantees, surrender charges, and loads, the two features
that have a large value impact are the "participation rate" and the
"indexing method". Indexing methods vary from product to product.
Three are in common use, including the annual resets (ratchets),
the point-to-point, and the high-water mark. In most cases,
equity-linked interest is credited, over a pre-defined term, using
one of these methods.
[0008] Participation Rates
[0009] The participation rate determines how much of the index
increase will be credited. For example, a 50% participation rate
means the individual will receive 1/2 the increase in the equity
index during the measurement period credited as interest. In the
annual ratchet design, this equity related interest would be
credited every year. In the point-to-point design the interest
crediting is calculated using the change from point A (contract
issue) to point B (say, 7 years after issue). The participation
rate is reset annually in the annual ratchet EIA design. For the
point-to-point design, the participation rate is set for the
point-to-point period. At the end of the period (annually for the
annual ratchet design), the participation rate may change. How
participation rates change is not always disclosed in the retail
(i.e., individual) market. There are several possible reasons for
this. First, the reset process is complex--both to explain and
understand. Second, a full explanation requires complete disclosure
of fees and margins. Third, some carriers want to retain
flexibility to increase fees and margins in the future, without the
problems that may come with communication of the fee increase. In
the retail market, absent more restrictive regulatory controls, the
reset process is likely to remain in the proverbial "black
box."
[0010] Interest Credits May Be Limited
[0011] Some retail EIA designs place limits on the interest
credited. For example, if the participation rate is 75% and the
equity index, for example, the S&P, delivers a 40% return over
the measuring term, the calculated participation rate would be 30%
but the contract may limit the interest credited to, say, 10%.
These limits are called "rate caps" or simply "caps." As another
example, the contract may credit 100% of the increase in the index,
but cap the interest credit to, say, 10%. With some EIA designs,
the change in the index may be measured by using an average of the
index values, instead of the index value on a particular day. Some
contracts credit interest using a "simple interest" basis instead
of compound interest. With simple interest, only the original
contribution grows with interest. In other words, interest credits
do not grow with interest. Each of these design features play a key
role in how the contract will perform relative to the buyer's
expectation. For example, buying the point-to-point design at the
start of a bull market may create dissatisfaction if the reset
"point" comes in the middle of a bear market. If the individual
tries to withdraw contributions invested before the end of some
"holding period" (e.g., essentially a "maturity" date), surrender
charges make it economically painful.
[0012] Early Withdrawals are Charged Exit Fees
[0013] Surrender charges vary from EIA contract to EIA contract.
However, most EIA contracts are designed to provide "free" access
for small withdrawal requests, such as up to 10% per year, and
"free" access for death. In general, the charges for other
premature withdrawals can be quite high, in some cases in excess of
10%. These charges, of course, accrue to the benefit of the
carrier. Some EIA contracts are also designed to provide access
using an "imputed" market value calculation. This calculation,
while intended to be fair, could be confusing and difficult for
individual buyers to understand and also exposes the individual to
significant economic loss.
[0014] Early withdrawals may also cost the carrier because sales
expenses, amortized over a period of, say, five to ten years, must
be recovered from the amount withdrawn. Otherwise the carrier could
realize a loss. However, insurance laws provide protection for the
consumer. By law, carriers are required to pay minimum surrender
values, and thus, collect no more than some pre-specified maximum
surrender charges. The minimum surrender values required by the
Standard Non-forfeiture Law (SNFL) are meaningful, but still
unattractive to many consumers. In a typical case, for example, the
law requires a guarantee that each $100 contributed (i.e.,
invested) can be surrendered at a value equal to $87.50 plus
interest at 2.85% per year. Even with these relatively low
surrender values, the carrier is still at risk of not fully
recovering its contract acquisition expenses.
[0015] Carrier's Asset Strategy for the Retail ETA
[0016] In implementing an EIA contract, the carrier invests the
premium in bonds and a portion of the anticipated interest on those
bonds is advanced and used to buy one-year call options on the
measuring equity index, say the S&P. If the interest that can
be advanced from the bonds is 4.00%, the contract's participation
rate is dependent on how many call options the carrier can buy with
the $4 of interest (per $100 of premium). If the price of the call
option is $5 per $100 of S&P value, the participation rate is
80%. At the end of the year, the call option will expire worthless
if the index is down. But, if the index is up, the call option will
provide the "payoff" needed to credit the proper interest. In
either case, the carrier will have sufficient assets to pay the
customer what was promised. This asset/liability management process
is repeated each year for the term (or holding period) of the
contract (at which point the surrender charges no longer
apply).
[0017] The participation rate for the EIA is, in effect, a hedge
ratio. The participation rate depends on the amount of money spent
by the carrier (4% in our example) and the price of the call
options. If call options cost $8 per $100, then the carrier can
"hedge" 50% and pay the customer 50% (participation rate) of the
positive change in the equity index. The amount of money used to
buy options ($4) is a function of the interest available on the
bonds purchased. The carrier wants their bond portfolio to return
the original $100 in a year's time. Therefore, if bonds deliver an
annual yield of 4.16%, the carrier could, at the beginning of the
year, afford to "advance" (i.e., spend) one year's interest toward
the purchase of call options. The interest advanced ($4) merely
represents the discounted, or current, value of the interest it
expects to receive on the bonds at the end of the year. This
"advanced" interest is commonly thought of as "interest available".
The insurance company has no control over option prices. If option
prices increase, but bonds were locked into a yield of 4.16%, then
the participation rate will fall.
[0018] Accordingly, there is a need for a method, system and
computer program product for minimizing the undesirable aspects of
an EIA contract--the undisclosed process for resetting
participation rates, high surrender charges, and very restrictive
liquidity. There is a need for the EIA contract to be for a set of
participants and guarantee a minimum participation rate, while also
offering a reasonable profit margin to the carrier. There is a need
for the method, system and computer program product to minimize
downside risk with respect to the purchase of EIAs to be available
to a plurality of individuals. There is a need for the plurality of
individuals to be participants of a group sponsored savings program
(either tax qualified or non-qualified). There is a need for the
method, system and computer program product for minimizing downside
risk with respect to the purchase of EIAs to carry low loads. There
is a need to guarantee a minimum participation rate. (i.e., a
guaranteed minimum percentage of the increase in a standard equity
index). There is a need for the participation rate to be based
entirely on a formula that removes carrier discretion. There is a
need for the formula to take advantage of the unique economic
benefits available to individuals (e.g., participants in savings
programs) by pooling their collective contributions (both from
previous years and the current year).
SUMMARY OF THE INVENTION
[0019] According to the present invention a computer implemented
method, computer-based system, and computer program product for
implementing a Group Equity-Indexed Annuity (GEIA) with a
guaranteed minimum participation rate for a plurality of
participants are provided. The GEIA contract takes advantage of the
unique aspects of an employer sponsored qualified savings plan (or
other "group" savings arrangement) to deliver a low load valuable
benefit, while offering the carrier a reasonable profit margin. The
GEIA contract requires the carrier to guarantee minimum
participation rates. If necessary, the carrier would advance the
cost of call options needed to bring the participation rate to the
minimum level when formula calculated participation rate is below
the guaranteed minimum level. The money advanced by the carrier is
repaid over time to the carrier, again through a formula used to
operate the GEIA contract and which is one of the key elements of
the innovation of the present invention. Indeed, the new process
(and formula) regulates the level of participation rates within a
given range. For example, the participation rate must always stay
in the range of 35% to 80%.
[0020] In an embodiment of the present invention, the GEIA contract
of the present invention employs a formula to set the key benefit
provisions of the GEIA contract as well as the carrier fee. This
formula and the concepts it implements are the essence of the
innovations that create new value for a plurality of participants.
The formula drives the participation rate, the available interest,
and the fee collected by the carrier. The carrier has no discretion
in any part of the calculation of the participation rate because
the participation rate is set by formula with values derived from
outside references for such items as the cost of call options, the
performance of the bonds purchased, the yield on those bonds, and
the return of the equity index. Regardless of the carrier's actual
costs for call options or the actual performance of the bonds
purchased, the carrier must honor the participation rate produced
by the formula (which is further constrained by minimum
guarantees). As a result, the selection (indeed, calculation) of
the participation rate is entirely visible to the group
contract-holder. To take advantage of the "group" aspects, the
"available interest" or "hedge budget" uses a formula-driven
amortization process that blends old and new money. Also, while the
carrier may invest cash flows at their discretion, the carrier
must, in effect, guarantee to pass-thru the returns of the outside
reference bond index by using the outside reference bond index
values for such items as market value, yield and duration, as
required in the formula. As envisioned, the GEIA contract allows
the sponsor of the group savings arrangement to select the bond
index used by the carrier (so long as the carrier agrees and the
outside reference values required by the formula are available).
The carrier's fee is built into the formula and provides a
reasonable fee for the risks inherent in the GEIA contract. By its
design, the carrier is relying on the opportunity to receive
continuous cash flow from a plurality of participants. This stream
of potential future contributions reduces the risk for the
carrier.
[0021] In an embodiment of the present invention, the GEIA contract
also offers benefits that include a) the ability of the group
contract-holder (e.g., the savings plan sponsor) to cancel the GEIA
contract at a value that is derived by formula and fair to all
parties, including the carrier, the contract holder, and the
participants; b) portability of benefits; c) insulated separate
account; and d) improved liquidity. The portability feature offers
participants the ability to preserve the GEIA guarantees on prior
contributions to the contract without being forced to continue to
participate in the savings plan. The insulated separate account
contract structure adds a layer of security in the unlikely event
the carrier experiences financial problems. Based on insurance
laws, the assets in the insulated separate account are not
available to meet the obligations of the carrier's general account.
Liquidity includes the right to transfer funds out of the GEIA to
other investment options in the employer sponsored savings program
and to withdraw from the GEIA.
BRIEF DESCRIPTION OF THE DRAWINGS
[0022] The above described features and advantages of the present
invention will be more fully appreciated with reference to the
detailed description and appended figures in which:
[0023] FIG. 1 depicts an exemplary flow chart of a method of
implementing a Group Equity-Indexed Annuity with a guarantee
minimum participation rate according to an embodiment of the
present invention;
[0024] FIG. 2 depicts an exemplary flow chart of a method of
developing participant account values according to an embodiment of
the present invention;
[0025] FIG. 3 depicts an exemplary flow chart of a method of
developing group contract values to calculate participation rates
according to an embodiment of the present invention;
[0026] FIG. 4 depicts an exemplary flow chart of a method of
developing contract market value according to an embodiment of the
present invention;
[0027] FIG. 5 depicts an exemplary block diagram of a system in
which the present invention can find application;
[0028] FIG. 6 depicts an exemplary block diagram of a system of
FIG. 5 in which the present invention can find application; and
[0029] FIGS. 7A-7D depict results that the algorithm would have
produced using historical information for a Group EIA contract
started in 1985.
GLOSSARY OF TERMS
[0030] Carrier: In the content of the present invention, a carrier
is an insurance company that implements a Group Equity-Indexed
Annuity (GEIA) with a guaranteed minimum participation rate for a
plurality of participants.
[0031] Participant: In the context of the present invention, a
participant is an individual in a set (or plurality) of individuals
who has the option to make contributions to a Group Equity-Indexed
Annuity (GEIA) with a guaranteed minimum participation rate.
[0032] Hedge Budget: In the context of the present invention, a
hedge budget is the amount of money advanced by the carrier, based
on calculated interest earnings expected from the cash flows
to/from the GEIA, for the purchase of one-year call options on the
S&P index.
[0033] Interest: In the context of the present invention, interest
is the calculated return credited to participant account
balances.
[0034] Call: In the context of the present invention, a call is the
option to buy a given security at a given price before a given
date.
[0035] Old Money: In the context of the present invention, old
money is the contributions deposited to an GEIA cell in previous
periods including interest credited.
[0036] New Money: In the context of the present invention, new
money is the contributions now being deposited to the GEIA cell in
a current period including interest now being credited.
[0037] Blend: In the context of the present invention, a blend is
the hedge budget derived from old money appropriately mixed with
new money using the group EIA algorithm.
[0038] Participation Rate: In the context of the present invention,
a participation rate is a percentage calculated by formula that
determines how much of the equity index is credited to the GEIA
account balance as interest.
[0039] Indexing Method: In the context of the present invention, an
indexing method is a method used to allocate a benefit over a
pre-determined period of time.
[0040] Participant Account Value: In the content of the present
invention, the participant account value is the sum of the
contributions plus Interest minus withdrawals minus withdrawal
charges.
[0041] Group Contact Account Value: In the context of the present
invention, the Group Contract Account Value is the total of all
Participant Account Values.
DETAILED DESCRIPTION OF THE INVENTION
[0042] The present invention is now described more fully
hereinafter with reference to the accompanying drawings that show
embodiments of the present invention. The present invention,
however, may be embodied in many different forms and should not be
construed as limited to embodiments set forth herein.
Appropriately, these embodiments are provided so that this
disclosure will be thorough and complete, and will fully convey the
scope of the present invention.
[0043] According to the present invention a computer implemented
method, computer-based system, and computer program product for
implementing a GEIA with a guaranteed minimum participation rate
for a set of participants are provided. An algorithm sets a
"participation rate" of a GEIA contract as well as the carrier fee.
The carrier is held accountable to the participation rate produced
by the bond index (which is used as a proxy for the carrier's
investment performance attributable to the GEIA cash flows) in the
formula, and subject to the guaranteed minimum participation rate.
The calculation of the participation rate is entirely visible to a
GEIA group contract-holder. The "hedge budget" is based on a
formula-driven amortization process that blends interest available
on old and new money from participants. The blending process used
in the formula converts realized and unrealized gains and losses
from the bond index into annual interest rates over the duration of
that bond index (i.e., the carrier's theoretical bond portfolio).
These interest rates are then used to calculate the amount of the
hedge budget. And, the carrier has no discretion to change the
calculated hedge budget. One having ordinary skill in the art would
recognize that there are many methods of "blending" the interest
available on old and new money from participants. In addition,
while our approach assumes the carrier has "no discretion", those
having ordinary skill in the art would recognize that it is
beneficial to permit some level of discretion.
[0044] The GEIA guarantees are portable. Terminating participants
are not forced to leave the contributions in the savings program to
receive the benefits of the GEIA. The contract assets are held in
an insulated separate account. The separate account contract
structure adds a layer of security in the unlikely event the
carrier experiences financial problems. Participant account values
in the GEIA can be transferred out of the contract to other choices
in the sponsored savings program. The GEIA withdrawal feature has
been designed to accommodate the most common needs of participants
(with no charge for certain withdrawals, and only a modest charge
for high levels of withdrawals). In an embodiment of the present
invention, the GEIA contract includes 12 individual GEIA "cells"
also referred to herein as GEIA accounts or GEIA buckets. Each GEIA
"cell" or GEIA bucket corresponds to a month in a year in which
contributions can be made on a predetermined business day of the
month. Within each GEIA bucket for a month, old and new
contributions are added to create a single account balance for that
GEIA cell (both for each participant and for the total of all
participants). A participant's account balance in the GEIA is,
therefore, the sum of, up to, 12 individual GEIA "cell" balances.
One having ordinary skill in the art would recognize that any
number of GEIA cells can be provided in a GEIA contract and is not
limited to the embodiment set forth herein. In addition, it is
readily apparent that the contract assets need not be held in a
separate account.
[0045] In an embodiment of the present invention, interest is
credited using an annual ratchet design. Compound interest can be
paid net, net of all fees and expenses, participation rates can be
recalculated annually for each GEIA account (or cell), subject to
minimum and maximum constraints, and even "bonus interest" can be
paid if available, such as if participation rates reach a
pre-defined maximum level. The alternative to paying bonus interest
is to simply ignore the "maximum constraint" and pay a higher
participation rate. (However, participation rates in excess of 80%
would lead to the purchase of, arguably, too many call options that
could expire worthless. Crediting a "bonus" rate may be safer for
the participants since their contributions are assured some
interest, even if the call options purchased to achieve 80%
participation rate should expire worthless. This interest crediting
strategy reduces the GEIA's downside risk for participants.) Those
having ordinary skill in the art would recognize that interest need
not be credited using an annual ratchet design.
[0046] In an embodiment of the present invention, participation
rates vary based on a hedge budget, and the cost of the one-year
call options on the equity index. The cost of the call options is
calculated using values including, but not limited to, the Black
Scholes option pricing model and external reference values for the
one-year risk-free rate, the equity index volatility, and equity
index dividend rate. The carrier has no discretion to change the
cost of the options. The interest available to buy the call options
is derived using "stable value" interest crediting concepts. Each
GEIA cell ("GEIA Account") of a GEIA contract operates with its own
participation rate. In an embodiment of the present invention,
participation rates can be extended to use participation rates
based on a "barrier." With participation rates based on barriers,
the carrier credits different participation rates at different
levels of index performance. For example, 50% on first 10%
increase, 60% on next 10% increase, and 70% on equity index
increases over 20%. Many other variations are possible, including
"averaging", point-to-point, and caps, but the basic algorithm
remains unchanged. One having ordinary skill in the art would
recognize that the cost of the call options does not need to follow
the Black-Scholes option pricing model, nor does it have to be
based on the external reference values.
[0047] In an embodiment of the present invention, withdrawals are
permitted at the beginning of each month, often without charge,
but, at times, may be subject to some charge. Full liquidity, at no
charge, is available after a number of "anniversaries" have passed
(i.e., maturity), such as on the sixth anniversary since deposit.
The "Maturity" value can be paid out, or recommitted for another
holding period or term (e.g., another six years). Partial liquidity
prior to maturity, at no charge for circumstances including, but
not limited to, annually up to 10% of prior year's account balance
for income purposes, death, and financial hardship (as defined by
the group savings program). Surrender charges of 5%, for example,
can be applied to withdrawal amounts in excess of "free"
withdrawals (subject to SNFL maximum charge--charge is less than 5%
only if interest credits are very low for several years). In an
embodiment of the present invention, these surrender charges do not
accrue to the benefit of the carrier. Instead, the charges are
designed solely to discourage participant withdrawals and all
collected charges help improve participation rates for the balance
of the funds in the GEIA. This is another value-added benefit
obtained by operating the GEIA for a plurality of individuals. In
an embodiment of the present invention, the cost of the minimum
accumulation guarantees provided by the SNFL can be fully absorbed
by the insurer, in exchange for a risk charge (in effect, another
fee that reduces the blended hedge budget). In an embodiment of the
invention, all withdrawals (except "maturity" amounts) can be
processed using a "pro-rata by individual" protocol. Alternative
withdrawal protocols can also be used, if the proposed protocol is
deemed too burdensome for the carrier. One having ordinary skill in
the art would recognize that there are many ways to handle and
account for withdrawals, withdrawal charges, and contract
"maturity".
[0048] In an embodiment of the present invention, fees are deducted
from the performance of the bond index. The carrier's total fee,
includes, but is not limited to, brokerage fees, and can be
negotiated and subjected to a "most favored nation" clause. One
having ordinary skill in the art would recognize that there are
many ways for the carrier to collect its fees.
[0049] In an embodiment of the present invention, option costs and
payoffs are calculated using external indices and the carrier
assumes all option liquidity risk and counter-party risk. In an
embodiment of the present invention, the carrier's bonds purchased
with the cash flows from the plurality of participants are assumed
to track the performance of a bond index, such as Lehman corporate
long bond index. The carrier, in effect, guarantees to match the
performance of the bond index, and the actual money management
performance has no impact on participation rates. In an embodiment
of the present invention, the Group EIA contract is portable and
provides participants with the option of maintaining deposits in an
the contract (without the need to continue participating in the
group savings plan), or can issue an individual certificate that
preserves the same benefits and guarantees available to the other
GEIA participants.
[0050] In an embodiment of the present invention, account values
are reported to participants. Values reported to participants
included, but are not limited to, the ongoing value payable at
death, for financial hardship, and "maturity," and the surrender
value payable on full withdrawal, such as the ongoing value less
applicable surrender charges. The ongoing value can be used to
derive the amount of "free" withdrawals. The surrender value is
relevant for cash-outs in excess of "free" withdrawals (and
transfers out of GEIA to other options in the savings program). In
an embodiment of the present invention, values reported to plan
sponsors include, but are not limited to, total ongoing values,
total surrender values, bond and S&P index values, option
prices, available interest, and market value of cash flows based on
the bond index values.
[0051] In an embodiment of the present invention, 401(k) plans (and
other group savings programs) use twelve monthly GEIAs cells inside
one group contract underwritten by the insurance carrier. Each
month, only one GEIA cell (GEIA account) in a GEIA contract would
accept new contributions. Each GEIA bucket would last for twelve
months, after which interest would be credited to the bucket and
the principal sum plus interest credited "rolls" into the
corresponding new cell/bucket for that month. For example, a
January 2005 cell would be credited interest at the beginning of
January 2006 and principal plus credited interest becomes the
starting value for the January 2006 cell. To this amount, new
contributions are added and withdrawals are subtracted. Each of
these monthly GEIA cells would have unique participation rates,
anniversary dates, crediting rates, cash flows (in and out), etc.
The algorithm that follows is for one of these GEIAs cells and not
for all 12 GEIA cells. Each GEIA cell however, uses the same basic
algorithm. The total Group EIA contract account balance for an
individual participant is the sum of the account balances in the
twelve GEIA cells outstanding at any one time. The record keeping,
at the individual level, could be handled by the plan administrator
(if properly coordinated with the carrier) or by the carrier (more
likely). In an embodiment of the present invention, the algorithm
is written to treat each monthly GEIA cell, such as January,
February, etc., as a standalone GEIA contract. In an embodiment of
the present invention, GEIA sells in positive positions do not
subsidize those in poor positions. In another embodiment of the
present invention, some GEIA cells may subsidize other cells.
[0052] An exemplary flow chart for implementing a Group
Equity-Indexed Annuity contract with a guaranteed minimum
participation rate for a plurality of participants is shown in FIG.
1. The method begins in step 100. In step 100, the status of the
GEIA contract is determined. The status of the GEIA contract can be
active or discontinued (i.e., inactive). In most cases, the
contract is "active" and, therefore, the carrier accepts new
contributions and processes withdrawals as required by the GEIA
contract. The contract can be discontinued (i.e., no longer accepts
contributions) if discontinued by the group savings program or the
carrier. An active GEIA contract is one that is available to
receive contributions. The GEIA values at the total group level and
at the individual participant level are inherently interconnected.
Indeed, neither value can exist without the other. A GEIA cannot
operate without a plurality of participants.
[0053] In step 102, the interconnections between the group and
individual account values are developed. In an embodiment of the
present invention, participant account values are developed for
each participant in the group. The carrier (or plan administrator)
develops the account values. The development of a participant's
account values is derived from the balance in each GEIA account
(i.e., the balance in each of the 12 GEIA "cells") for the
participant as shown in detail in FIG. 2. In an embodiment of the
present invention, the development of a group's contract account
values is derived from the balance in each GEIA account (i.e., the
12 "cells") for the plurality of participants in the group as shown
in FIG. 3. The group's contract account values are used to derive
data required for the calculation of participation rates, contract
discontinuance value, and the like.
[0054] In step 104, total account balances are determined. In an
embodiment of the present invention, the account balances that are
determined include the individual account balance for each of the
participants in the group and the group's total account balance.
The carrier or the plan adnministrator can perform these
calculations. In the FIG. 1 embodiment of the present invention,
the account balance for each of the participants in the group and
the group's total account balance are developed each month, but can
be any interval specified by the GEIA contract. The account balance
for a participant is the sum of each of the participant's GEIA
balances in each monthly GEIA account. One having ordinary skill in
the art will recognize that a GEIA account can be set up other than
on a monthly basis, and can also be set up weekly, bimonthly,
quarterly and semi-annually, for example. The group total account
balance is the sum of each participant's total account balance. The
group total account balance is used to calculate various values
including, but not limited to, participation rates.
[0055] An exemplary flow chart of a method of developing a
participant account value for a GEIA account of a GEIA contract
according to an embodiment of the present invention is shown in
FIG. 2. In the FIG. 2 embodiment of the present invention, the
participant account value is developed for each GEIA account of
each participant in the group. Each GEIA contract includes a
predetermined number of GEIA accounts that define when
contributions are deposited into the contract. In the FIG. 2
embodiment of the present invention, a GEIA contract allows
contributions to be deposited into the GEIA contract on the first
of every month. In such a case, twelve accounts will exist for the
GEIA contract and each participant in the group could have twelve
GEIA accounts. In the FIG. 2 embodiment of the present invention,
each of the GEIA accounts will have an anniversary date that is one
year from the date that contributions are allowed to the respective
GEIA account. One having ordinary skill in the art would recognize
that the anniversary date can be any period of time specified by
the GEIA contract, such as quarterly, semi-annually, and the
like.
[0056] At step 200, data that identifies the participant is
obtained from the participant or the plan administrator. In an
embodiment of the present invention, the participant (or plan
administrator) enters the identification data on an application
form, or the like as required by the GEIA contract. In an
embodiment of the present invention, the participant enters the
identification data on an electronic form provided by a computer.
The identification data can include, but is not limited to,
participant name, participant address, participant social security
number, employer, participant age, beneficiary name and
address.
[0057] In step 202, it is determined if the GEIA Account is new
(i.e., first time contributions are accepted to that Account). If
so, the process proceeds to step 204. In step 204, the participant
deposits an initial contribution into the GEIA account of the
contract. In an embodiment of the present invention, a
participation rate is communicated to the participant prior to the
deposit of the initial contribution. At the time of the initial
deposit, the participant's GEIA account value for the account
corresponds to the amount of the contribution. After the initial
deposit, the process proceeds to step 206.
[0058] In step 206, it is determined whether an anniversary date of
the GEIA account has arrived. If so, the method proceeds to step
208. If not, the process proceeds to step 214. In step 206, account
maintenance is performed to the participant's GEIA account value.
Account maintenance includes, but is not limited to, obtaining a
withdrawal request, if any, from the participant, depositing
additional contributions (on each account anniversary) from the
participant, crediting interest based on the participation rate and
change in the equity index during the preceding year, and crediting
bonus interest, if available.
[0059] In step 210, the index interest factor is calculated for the
purpose of crediting interest. In the FIG. 2 embodiment of the
present invention, the index interest factor is the participation
rate calculated at the beginning of the previous year multiplied by
the percentage increase in the equity index during the preceding
anniversary year. In the FIG. 2 embodiment of the present
invention, the index interest factor is not less than zero.
[0060] In step 212, the participant's account value for the GEIA
account is calculated. The participants account value in the GEIA
account is the prior account value plus the index interest and any
applicable bonus interest less the amount of any withdrawal request
and applicable withdrawal charges. Participants can make some
withdrawals with no surrender charge ("free withdrawals"). These
are limited to pre-defined amounts and/or events. All other
withdrawals and transfers are subject to a maximum surrender charge
on the amount taken in excess of the "free" withdrawals and
transfers. The charge is designed to encourage a long-term
commitment to the GEIA, and discourage market-timing behaviors.
Withdrawals and transfers can be made throughout the year and on
the GEIA account anniversary.
[0061] In step 214, the account balance is calculated reflecting
withdrawals (which may be zero) from the GEIA account. In this
case, the process proceeds to step 216. In step 216, applicable
withdrawal charges are identified, if any. In step 218, the
participant's account value is calculated. The account balance is
the previous account value less any withdrawals and identified
withdrawal fees.
[0062] An exemplary flow chart of a method of developing group
contract account values to calculate participation rates according
to an embodiment of the present invention is shown in FIG. 3. In
the FIG. 3 embodiment of the present invention, the method begins
in step 300. In step 300, data is collected. The data collected can
include, but is not limited to, contributions by all participants
(separately, and in total) to a GEIA account of the GEIA contract,
yield for the predefined bond index, duration of bond index, the
total return of the bond index for a previous month, the margin
used to reflect bond risks and cost of minimum accumulation
guarantees, the carrier fee and charge for transferring the minimum
accumulation guarantees to the carrier, and data necessary to
calculate the cost of call options on standard equity index, and
the index return for the previous twelve month period.
[0063] In step 302, the participation rate for the GEIA account is
set and communicated to participants. In the FIG. 3 embodiment of
the present invention, the participation rate is set in accordance
with an algorithm discussed in further detail herein below. In step
304, it is determined if t=0 (first time contributions are accepted
to that GEIA Account). If so, the method proceeds to step 306. In
step 306 data is collected. The data collected can include, but is
not limited to, bond, index yields, margin for risks, carrier fees,
and data necessary to calculate cost of call options on the equity
index. Note, if t=0, data regarding the market value of the bond
index, and change in the standard equity index is not needed and
therefore not collected. In step 308, the participation rate is
calculated in accordance with the algorithm discussed in further
detail herein below.
[0064] In step 312, available interest for the GEIA account/bucket
(i.e., cell) is calculated. In the FIG. 3 embodiment of the present
invention, the available interest is calculated in accordance with
the algorithm discussed herein below. The available interest is
calculated using a combination of old money and new money for the
GEIA account. In step 314 data is collected. The data collected can
include, but is not limited to, bond index yields, margin for bond
risks and minimum accumulation guarantees, carrier fees, and data
necessary to calculate cost of call options on standard equity
index, and the payoff from the prior year's purchase of call
options. Note, the data required includes the payoff amount on the
prior year's call option since the payoff amount is another form of
contribution that must be invested to track the performance of the
bond index. In step 316, the participation rate is calculated in
accordance with the algorithm discussed in further detail herein
below.
[0065] In step 318, it is determined if the calculated
participation rate is within the GEIA contract required range. If
so, the process proceeds to step 320 where it ends and the
participation rate is communicated to participants. If not, the
process proceeds to step 322. In step 322, the carrier adjusts the
participation rate to meet the required range. In an embodiment of
the present invention, the participation rate is either increased
to the minimum level, or decreased to the maximum level. An
increase requires the insurer to deposit sufficient cash to
purchase additional call options.
[0066] An exemplary flow chart of a method of developing the group
contract market value according to an embodiment of the present
invention is shown in FIG. 4. In the FIG. 4 embodiment of the
present invention, the GEIA contract's market value can be
developed to determine the liquidation value of the GEIA contract,
and to determine participation rates. The liquidation of the group
contract includes immediate liquidation and slow liquidation.
Immediate liquidation includes the payment of the GEIA contract's
calculated market value (using the bond index values) and the
transfer of GEIA account balances to a new carrier. In an
embodiment of the present invention, slow liquidation includes the
carrier fixing the available interest factor for n years when
applying algorithm described later herein. In an embodiment of the
present invention, slow liquidation includes application of
algorithm and payment of GEIA account balances as they each reach
their natural maturity, and the preclusion of new
contributions.
[0067] The market value of the contract can be developed separately
for each GEIA account of the GEIA contract. In the FIG. 4
embodiment of the present invention, the method begins in step 400.
In step 400, data is collected. The data collected can include, but
is not limited to, total contributions to the "open" GEIA,
predefined bond index yields, duration of bond index, the total
return of the bond index for a previous month, margin for bond
risks, carrier fees, data necessary to calculate cost of call
options on standard equity index, and payoff amount from previous
call option purchases.
[0068] In step 402, the market value of Groupp EIA contract is
calculated. In the FIG. 4 embodiment of the present invention, the
contract market value is the previous market value plus the total
return of the bond index for the month, new contributions, new
payoffs from previous call options, and deposits from all sources
less withdrawals, carrier fees, cost of call options for each
anniversary year, and reimbursement to the carrier for any
subsidized participation rates.
[0069] In step 404, cash flows are processed. Cash flows include
deposits and Withdrawals. In the FIG. 4 embodiment of the present
invention, deposited cash flows include the deposit of
contributions into one or more EIA accounts, call option payoffs,
and adjustments by carrier (to support minimum participation rates
and minimum accumulation guarantees). Deposit cash flow occurs on a
monthly basis, such as the predefined period in a month when
contributions can be deposited into a GEIA account. In an
embodiment of the present invention, withdrawal cash flows include
withdrawal for the cost of call options, carrier fees, amount of
withdrawal requests, and reimbursements for carrier
adjustments.
[0070] The present invention guarantees a minimum participation
rate for the holding period (e.g., six years) of each GEIA account.
The minimum participation rate is determined through negotiation.
At the end of the holding period for the GEIA account the minimum
participation rate can change. In an embodiment of the present
invention, the participation rate may exceed 100%. In an embodiment
of the present invention, participation rates are held within a
corridor and may not exceed, say, 80%. The participation rate is
calculated using a formula that is entirely independent of the
carrier's money management performance. The experience from
withdrawals, withdrawal charges, minimum accumulation guarantees,
index volatility, and interest rate changes is reflected in future
participation rates, as developed by the algorithm. The Algorithm
develops values assuming contributions track results using a
hypothetical investment portfolio (the bond index). These values
are used to calculate the available interest for the hedge budget.
The hedge budget is not dependent on the carrier's money management
performance. The algorithm is illustrated in the Excel spreadsheet
shown in FIGS. 7A-7D. FIGS. 7A-7D show what the GEIA would have
produced using historical information for a GEIA started in
1985.
[0071] The algorithm described here makes some simplifying
assumptions, largely for presentation purposes. Extensions and
refinements, however, are fairly straightforward once the process
is understood. We assume an annual ratchet GEIA and time periods,
t, measured in years (but extensions to, say, monthly periods or to
the "point-to-point" design are possible). The GEIA allows
participants to make some withdrawals with no surrender charge.
These are limited to pre-defined amounts and events, for example
complete access at the end of the contribution "holding period"
(effectively a maturity date). All other withdrawals (and
transfers) are subject to a maximum surrender charge (say, 5%) on
the amount withdrawn in excess of the "free" withdrawals (and
transfers). The surrender charge should be high enough to
discourage "market-timing" activity by participants, but not too
excessive. A penalty of 5% (subject to SNFL maximums) should
suffice in most GEIA contracts.
[0072] Withdrawals (and transfers) are permitted throughout the
year, not just on the anniversary. Since a participant may have
money in more than one GEIA account, all withdrawal requests
(except "maturity" payments are handled on a "pro rata by
individual" basis). The calculation is tedious, but fairly
straightforward, and not illustrated here.
[0073] Interest credits are added to individual account balances on
each anniversary. Withdrawals and transfers prior to the
anniversary date from the GEIA account earn no interest credits for
that year. This is another form of surrender charge and further
acts to discourage "trading" activity (which over the long term
could prove detrimental to the participants in the GEIA).
[0074] We also assume the carrier will deposit (and manage)
contributions and withdrawals (i.e., cash flows) through an
insulated separate account contract (see step 404). The assets in
the separate account are not available to meet the carrier's other
obligations. In an embodiment of the present invention, the market
value of the separate account is below the market value of the
group contract. Carrier's general account makes the separate
account whole. In an embodiment of the present invention, the
market value of the separate account is above the market value of
the group contract. The excess value belongs to carrier's general
account. The algorithm can operate exactly the same if the assets
are managed as part of the carrier's general account.
[0075] The GEIA contract is non-participating in the investment
results of the separate account. The investment performance of the
assets will have no impact on participation rates. The GEIA
contract, however, does participate, and fully absorbs, the effects
cash flows (e.g., contributions, withdrawals) have on future
participation rates. Therefore, the GEIA has both participating and
non-participating features. The contract participates in the
experience it generates (e.g., contributions, withdrawals) and does
not participate in the experience it does not generate (e.g., the
carrier's investment results on the cash flows). The GEIA contract
can also offer the choice of operating the minimum accumulation
guarantees on a par or non-par basis. In the non-par design, the
carrier would collect an extra fee or margin and if the minimum
guaranteed value is higher than the participant account balance,
the insurer's general account reimburses the difference. One having
ordinary skill in the art would recognize that the contract can
also operate on a participating basis.
[0076] The experience (positive or negative, as calculated by the
algorithm) from withdrawals, withdrawal charges, index volatility,
and interest rate changes is reflected in future participation
rates, as, developed by the algorithm. These experience elements
will neither benefit nor hurt the carrier.
[0077] The GEIA contract receives initial contributions at time t=0
(GEIA cell start date) equal to C.sub.0. (This is the total of
contributions from all individuals allocating funds to that GEIA
account at t=0.)
[0078] The carrier charges a fee, f.sub.n (in basis points), times
the beginning of the month account value. (The algorithm assumes
the fee is deducted at the end of the month from the assets in the
separate account. Other methods are possible. In any case, it is
not deducted from the account value; it is merely calculated using
the account value as the multiplier.)
[0079] The participation rate algorithm at the initial contribution
is:
AV.sub.0C.sub.0,R.sub.1(y.sub.0f.sub.0)/{(1+Y.sub.0-f.sub.0)*O.sub.0},A.-
sub.0=C.sub.0-R.sub.t*O.sub.0*C.sub.0 Alg (1)
[0080] In Alg (1), "t" represents time, measured from GEIA
inception or the time when funds are first received. The GEIA
begins when the first set of funds are received at time t=0. The
first such annual anniversary or the end of the specified interval
is represented by t=1. This labeling continues ad infinitum. (Note,
we have twelve EIAs each with their unique time t=0, 1, 2, etc.).
"C.sub.t" represents the total participant contributions made at
time t, where t=0, 1, 2, . . . corresponds to the specific time
when contributions can be made to the GEIA account. Let "y.sub.t"
represent the yield-to-maturity of the bond index measured at time
t. In an embodiment of the present invention, the yield-to-maturity
is adjusted by a margin to budget for the risk of bond calls and
the risk of defaults, as well as the cost of the minimum
accumulation guarantee. Note, the minimum guarantee can be absorbed
through the hedge budget or simply transferred to the insurer for a
price. Let "AV.sub.t" represent the sum of the individual account
values at time t.
[0081] "A.sub.t" represents the contractual market value of the
assets used to back the individual account balances guaranteed by
the carrier. For our purpose, the contractual assets will be
replicated using the value of a long-duration bond index, like the
Lehman long corporate bond index. By using an external bond index,
the participants are guaranteed the returns from the bond index and
the carrier, in effect, guarantees "average" money management
performance. Let F.sub.n represent the fee withdrawn from the
assets at time n. The charge equals f.sub.n * AV.sub.n and is
deducted from the contractual assets, A.sub.n. The dollar-weighted
rate of return attributable to F.sub.n, collected throughout the
year, is denoted by r'''. Let "r.sub.t" represent the total rate of
return of the bond index from time t-1 to t, one full account year.
In Alg (1), R, (the participation rate) must exceed m%, but never
more than m*%, where m% and m*% represent the minimum and maximum
permissible participation rates. When R, does not exceed m% the
carrier adds cash to bring the participation rate to m%. In such
cases, the carrier is reimbursed as soon as subsequent resets
produce participation rates in excess of the minimum, m%.
[0082] Let "0.sub.t" represent the percentage cost of one-year call
options on a standard equity index at time t. In the FIG. 1
embodiment of the present invention, the standard equity index is
the S&P 500 without dividends. The cost is derived using
publicly available information regarding the one-year risk-free
rate, the volatility of the index, and the index dividend return.
Like the contract asset values, the cost of the call options is
derived by formula, and kept outside the carrier's control or
discretion.
[0083] The participation rate algorithm for times after the initial
contribution is:
AV.sub.t=(AV.sub.t-1,-.SIGMA.fW-.SIGMA.cW-.SIGMA.sW)*(1+RI.sub.t)+C.sub.-
t, summations from t-1.ltoreq.n<t)
Where RI.sub.t=Max (0, (S.sub.t/S.sub.t-1)*R.sub.t-1)
[0084] In Alg (2), "fW.sub.n" represents the total withdrawals made
with no surrender charge made at time n, where "n" can be any time
during the year. In an embodiment of the present invention, n runs
from the beginning of year "t" to the end of that year, such that
t<n.ltoreq.t+1. Let "cW.sub.n" represent the total "chargeable"
withdrawals made at time n, where n runs from the beginning of year
"t" to the end of that year, such that t<n.ltoreq.t+1. Let
"sW.sub.n" represent the total surrender charges collected on
chargeable withdrawals at time n. Let "A*.sub.t" represent the
contractual market value of the GEIA assets after the contributions
at time t and after the payoff from call options purchased in the
prior year. Let "D.sub.t" represent the duration of the bond index
measured at time t. Let "r'.sub.t" represent the dollar-weighted
total rate of return associated with the "free" withdrawals. Let
"r''.sub.t" represent the dollar-weighted total rate of return
associated with the chargeable withdrawals and the collected
surrender charges. Let "S.sub.t" represent the value of the
standard equity index without dividends at time t. Let "J.sub.t"
represent the amount of interest available from the security
portfolio to buy one-year call options on the standard equity index
at time t. Let "I.sub.t" represent the conversion from market
yields to "smoothed" or "blended" yields available over the
duration, D.sub.t, of the bond index used to derive the contract
asset values, A.sub.t. Let "P.sub.t" represent the payoff at time t
from the call options purchased at time t-1.
[0085] Alg (2) is an iterative process that is applied from t=1, 2,
3 . . . n. To determine, R.sub.t, the participation rate, I.sub.t
is calculated using the following:
AV.sub.t(1+I.sub.t).sup.D.sub.t=A.sub.t(1+y.sub.t-f.sub.t).sup.D.sub.t
Equ (1)
[0086] Then, J.sub.t is calculated using the following:
J.sub.t=AV.sub.t*I.sub.t/(1+I.sub.t) Equ (2)
[0087] Then, R.sub.t+1 is calculated using the following:
R.sub.t+1=J.sub.t/O.sub.t Equ (3)
[0088] From this we derive
A.sub.t=A.sub.t-R.sub.t+1*O.sub.t*AV.sub.t Equ (4)
[0089] Again, the R is subject to constraint limits (m% and m*%).
If R should exceed m*%, then the factor J.sub.t will be reduced to
bring R to m*%. The excess will be available as a "bonus" credited
currently, in addition to interest credits based on the prior
year's participation rate. If R falls below m%, the carrier kicks
in enough money to buy sufficient options to bring R to m%. This
"subsidy" is repaid as soon as practicable and the amount repaid is
deducted from the contractual market value of assets in the
GEIA.
[0090] Fees are deducted from the insulated separate account and
the deduction is also reflected in the contractual market value of
assets in the GEIA (as derived using the bond index). Fees can also
be negotiated & subject to a "most favored nation" clause. In
an embodiment of the present invention, a participant will have the
option to keep the contributions in the GEIA if terminated from the
employer. In an embodiment of the present invention, the carrier
will issue an individual certificate to the participant that
preserves the participant's benefits and guarantees.
[0091] In an embodiment of the present invention, if the plan
sponsor (or carrier) wishes to terminate the arrangement, the
liquidation basis is to transfer cash at the contractual market
value of assets and also transfer liabilities (equal to the total
individual account values). These assets and liabilities would be
transferred to a new carrier. At the sponsor's option, as an
alternative to this market value liquidation; the carrier may
calculate a fixed "available interest" factor I to be used in
determining participation rates over the next n (e.g., six) years.
As GEIA account balances reach their natural "maturity", the
carrier pays the maturity values then falling due (which are then
available for participants to reinvest in other plan options). In n
(e.g., six) years time, the last maturity payment is made and the
contract is fully liquidated.
[0092] In an embodiment of the present invention, since all
necessary information (e.g., cash flows, index prices) is never
instantaneously available as assumed in the Algorithm, carriers
will need to adopt certain protocols for operating the new GEIA
including the carrier can set the participation rate n days in
advance (based on then actual index prices and estimated cash
flows) and as the carrier did before, but communicate the
participation rate as an estimate. Then, x days later, once actual
information is available, the actual participation rate is
calculated and communicated. The carrier can either absorb the
risk/reward associated with this method (i.e., n days of slippage)
or can transfer the risk/reward back to the GEIA. In the later
case, the following year's participation rate would refect the
risk/reward associated with the prior estimated participation
rate.
[0093] Logical product extensions are contemplated by the present
invention. While the algorithm assumes all asset prices are pegged
to outside reference indices, it is possible to replace the indices
with the actual values delivered using an actively managed bond
portfolio strategy. Similarly, while the algorithm is used as part
of a bundled product solution inside an annuity contract, it is
obvious that the structure can be "unbundled" and repackaged to
achieve comparable values. The algorithm is presented using
recognized indices. It is, of course, possible to use different
indices (or combinations of different indices). This could be done
with both the bond index and the equity index. Therefore,
participation rates could use the same algorithm but with values
derived from, say, 50% of the Wilshire 5000 index and 50% of the
S&P 500 index. The number of possible combinations and
permutations is, in fact, virtually infinite. Applications to small
group savings programs are equally possible (both qualified and
non-qualified programs like 403(b), 457, 401, 529, and deferred
compensation plans). It is also possible to extend the concept to
association savings programs and, in fact, any logical "group" of
individuals. In this case, a collection of small plans (or
individuals) would combine their cash flows and be treated as a
commingled arrangement. Now, each plan (or individual) would enjoy
the benefits of the same participation rate achieved through the
aggregation (without the need to absorb the cash flow uncertainties
associated with small (or individual) savings programs). In
addition, it is possible to modify the design by purchasing
"out-of-the-money" equity options with the available interest. In
this case, the carrier's interest credits would equal all remaining
available interest (i.e., the amount not spent on
"out-of-the-money" call options) plus the payoff from the options.
It should be equally obvious that the new GEIA does not need to be
operated using 12 cells/buckets. It, in fact, can operate with any
number of cells (including daily). Such product extensions are
obvious and claimed as part of the present invention.
[0094] An exemplary block diagram of a system in which the present
invention can find application is shown in FIG. 5. In the FIG. 5
embodiment, system 200 includes a plurality of systems 502a-502n.
The systems 502a-502n may be personal computer systems operated by
employees of an employer sponsoring ("sponsor") a self directed
group savings plan and GEIA plan administrator. Systems 502a-502n
are communicatively coupled to a data communications network, such
as the Internet 504. Systems 502a-502n allow users to perform
transactions over Internet 504 to system 506 including, but not
limited to, providing contributions to a GEIA, withdrawing funds
from a GEIA, and transferring funds to and from a GEIA. Requests
for information are generally generated by browser software running
on user systems 502a-502n in response to an event, such as input
from users. Requested transactions are received and processed by
system 506. Responses are transmitted from system 206 to the user
systems 502a-102n in accordance with the processed request.
[0095] In the FIG. 5 embodiment, Broker system 508 is
communicatively connected to system 506 and receives requests to
purchase a set of securities and calls relating to the requests for
transactions received by system 206 from the user systems
502a-502n. System 508 processes the received purchase requests and
transmits a response in accordance with the request.
[0096] An exemplary block diagram of a system of FIG. 5 is shown in
FIG. 6. In the FIG. 6 embodiment of the present invention system
600 can be any one of systems 502a-502n, 506 and 508 shown in FIG.
6. System 600 is typically a programmed general-purpose computer
system, such as a personal computer, workstation, and minicomputer
or mainframe computer. System 600 includes processor (CPU) 302,
input/output circuitry 604, network adapter 606, and memory 608.
CPU 602 executes program instructions in order to carry out the
functions of a system 602, 506, or 508 in accordance with the
present invention. Typically, CPU 602 is a microprocessor, such as
an INTEL PENTIUM.RTM. processor, but may also be a minicomputer or
mainframe computer processor. Input/output circuitry 604 provides
the capability to input data to, or output data from, system 600.
For example, input/output circuitry may include input devices, such
as keyboards, mice, touchpads, trackballs, scanners, etc., output
devices, such as video adapters, monitors, printers, etc., and
input/output devices, such as, modems, etc. Network adapter 306
interfaces system 600 with network 610. Network 610 may be any
standard local area network (LAN) or wide area network (WAN), such
as Ethernet, Token Ring, the Internet, or a private or proprietary
LAN/WAN.
[0097] Memory 608 stores program instructions that are executed by,
and data that are used and processed by, CPU 602 to perform the
data mining functions of the present invention. Memory 608 may
include electronic memory devices, such as random-access memory
(RAM), read-only memory (ROM), programmable read-only memory
(PROM), electrically erasable programmable read-only memory
(EEPROM), flash memory, etc., and electromechanical memory, such as
magnetic disk drives, tape drives, optical disk drives, etc., which
may use an integrated drive electronics (IDE) interface, or a
variation or enhancement thereof, such as enhanced IDE (EIDE) or
ultra direct memory access (UDMA), or a small computer system
interface (SCSI) based interface, or a variation or enhancement
thereof, such as fast-SCSI, wide-SCSI, fast and wide-SCSI, etc, or
a fiber channel-arbitrated loop (FC-AL) interface.
[0098] Memory 608 includes data 612, processing routines 614,
operating system 616, data structure 618 and notification routine
620. Data 612 includes data used by the present invention.
Processing routines 614 are routines that implement the functions
of the present invention. Operating system 616 provides overall
system functionality.
[0099] FIGS. 7A-7D show what the GEIA would have produced using
historical information for a GEIA started in 1985.
[0100] While specific embodiments of the present invention have
been illustrated and described, it will be understood by those
having ordinary skill in the art that changes can be made to those
embodiments without departing from the spirit and scope of the
invention.
APPENDIX
[0101] An analysis of the interest that historically might have
been credited on the group equity-indexed annuity (GEIA) that is to
be offered to participants in employer sponsored retirement plans.
The issue is approached by comparing the potential GEIA returns
with potential crediting on a 5-year Stable Value Fund and S&P
500 Total Returns. The results of that comparison are shown below
and the methodology for the comparison is then described.
TABLE-US-00001 1-year 3-year 5-year 10-year Worst Avg. Best Worst
Avg. Best Worst Avg. Best Worst Avg. Best Average Annual Returns on
Other Measures when EIA Hits a Specified Level EIA 0.0% 9.8% 44.0%
0.0% 11.0% 36.8% 1.6% 11.5% 30.9% 2.9% 12.1% 18.6% Stable 5.9% 8.7%
12.6% 6.5% 8.9% 13.1% 7.8% 9.1% 13.0% 7.4% 9.5% 11.6% Value (range)
11.6% 7.7% S&P Tot. -38.8% 12.1% 61.2% -16.1% 12.3% 33.3% 1.5%
13.0% 29.6% 4.2% 13.8% 19.2% Rtn. (range) 3.2% -2.7% Range of
Average Annual Returns on All Measures EIA 0.0% 9.8% 44.0% 0.0%
11.0% 36.8% 1.6% 11.5% 30.9% 2.9% 12.1% 18.6% Stable 5.3% 8.7%
13.7% 5.9% 8.9% 13.5% 6.2% 9.1% 13.1% 6.6% 9.5% 11.9% Value S&P
Tot. -38.8% 12.1% 61.2% -16.1% 12.3% 33.3% -3.8% 13.0% 29.6% 2.9%
13.8% 19.5% Rtn.
[0102] Basis of Calculation
[0103] Equity-Indexed Annuity
[0104] It was assumed that the EIA was a mature product in the plan
and that contributions to the product had been made in all years
leading up to the period being evaluated.
[0105] The interest is determined as a "participation rate" times
the percentage change in the S&P 500 Index without dividends,
plus a yearend bonus. The participation rate is limited to 80% and
any additional available value is credited as a bonus at the end of
the year.
[0106] The "available value" to provide index-based benefits is
earnings on the supporting bond portfolio minus the insurer's
operating margin (assumed to be 1.20%), plus any withdrawal charges
assessed against transfers and terminations prior to the end of the
year.
[0107] All participants entering a one-year interest-crediting
period receive the same participation rate and bonus, regardless of
when they made their contribution to the GEIA.
[0108] The earnings on the supporting bond portfolio reflected
equal monthly investments in 7-year bonds over the 84-month period
leading up to the year of crediting index-based interest. The
investments were assumed to be 50% A Corporate and 50% BBB
Corporate.
[0109] Stable Value Fund
[0110] The credited interest in the stable value fund is earnings
on the supporting bond portfolio minus an operating margin (assumed
to be 1.20%).
[0111] The earnings on the supporting bond portfolio reflected
equal monthly investments in 5-year bonds over the 60-month period
leading up to the month of crediting interest. The investments were
assumed to be 50% A Corporate and 50% BBB Corporate.
[0112] S&P 500 Total Return
[0113] The annual return is the compound monthly return including
dividends. This is different from the S&P returns without
dividends that are typically reported on television, radio, and
newspaper news reports.
[0114] Interpretation
[0115] The comparisons were prepared on the basis of available
historical data for S&P 500 monthly closing amounts, S&P
500 monthly total returns, S&P 500 annualized dividends,
historic index volatility derived from daily S&P 500 levels,
1-year LIBOR rates, CMT Treasury yields, and maturity-specific
spreads of A and BBB corporate bonds over commensurate Treasury
returns. Some data were unavailable for early periods and
approximations were made, where necessary. These include (a)
S&P 500 dividend prior to 1974, assumed to be 4%, (b) S&P
total return prior to 1974, derived from S&P 500 without
dividends plus the assumed dividend, (c) LIBOR prior to September
1989, assumed to be 1-year Treasury plus 0.40%, and (d)
maturity-specific spreads of corporate bonds over Treasuries prior
to 1985, assumed at the average level since 1984. The
approximations should cause little distortion because they are
based on relevant historical data and because they often had a
parallel impact on the items being compared.
[0116] The comparisons are based upon the assumption of equal
amounts being invested at the prevailing investment yields over a
multi-year period. In reality, amounts invested will vary based
upon the amount of contributions, the amount of interest credited
and retained, and the amount of withdrawals. Insofar as the same
assumption of level contributions was assumed for each product, no
bias was introduced into the comparison.
[0117] The first table shows the hypothetical historical returns
for the 5-year Stable Value fund and the S&P 500 Total Return
for the identical period for which the GEIA interest was
calculated. This profiles the difference in results if a
participant had made different choices at a specific time. Because
there are a number of occurrences in which the GEIA credited no
interest over a 1-year period or a 3-year period, the ranges of
comparable results for these occurrences for the Stable Value fund
and the S&P 500 Total Return are shown.
[0118] The second table shows the full range of results from worst
to best for all three investment allocations without regard to
correlating the timing of their occurrence. This provides some
measure of the relative volatility of the returns under the various
allocations.
[0119] Both tables contain the average annual results, which
reflect the long-term return differences that could occur if
historical patterns were to repeat themselves.
[0120] The differences between the GEIA interest and the Stable
Value fund interest are heavily influenced by two phenomena--(a)
the GEIA value is based upon the yield on seven-year investments
while the Stable Value fund is based on five-year investments,
which creates additional yield under most circumstances and (b)
interest based on index changes reflects any overperformance of the
index over a risk-free interest rate, and the period analyzed
contained such historic overperformance.
* * * * *