U.S. patent application number 15/065276 was filed with the patent office on 2016-06-30 for methods and systems for providing and maintaining retirement income.
The applicant listed for this patent is Marshall Greenbaum. Invention is credited to Marshall Greenbaum.
Application Number | 20160189302 15/065276 |
Document ID | / |
Family ID | 52001769 |
Filed Date | 2016-06-30 |
United States Patent
Application |
20160189302 |
Kind Code |
A1 |
Greenbaum; Marshall |
June 30, 2016 |
METHODS AND SYSTEMS FOR PROVIDING AND MAINTAINING RETIREMENT
INCOME
Abstract
Methods and systems for the provision of a targeted
risk-protected minimum income benefit or protected distribution
through the design and management of a trust that allows for
exposure to the equity and fixed-income markets. The targeted
minimum income amounts depend upon the performance of equity and
fixed income assets and risk mitigation instruments contained in
the Trust. The method and system rely upon the adjustment of
constituent assets to provide for the targeted minimum retirement
income amounts. The action of risk management procedures eliminate
reliance upon third-party guarantors. The methods and systems
include mortality management procedures that protect the
participants against longevity risk.
Inventors: |
Greenbaum; Marshall;
(Greenwich, CT) |
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Applicant: |
Name |
City |
State |
Country |
Type |
Greenbaum; Marshall |
Greenwich |
CT |
US |
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Family ID: |
52001769 |
Appl. No.: |
15/065276 |
Filed: |
March 9, 2016 |
Related U.S. Patent Documents
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Application
Number |
Filing Date |
Patent Number |
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14069829 |
Nov 1, 2013 |
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15065276 |
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12967920 |
Dec 14, 2010 |
8909540 |
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14069829 |
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12942952 |
Nov 9, 2010 |
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12967920 |
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61259350 |
Nov 9, 2009 |
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Current U.S.
Class: |
705/4 |
Current CPC
Class: |
G06Q 40/06 20130101;
G06Q 40/08 20130101 |
International
Class: |
G06Q 40/06 20060101
G06Q040/06; G06Q 40/08 20060101 G06Q040/08 |
Claims
1. A method for managing risk associated with offering a financial
product that provides minimum benefit payments to a customer, where
the customer invests in and owns an income protection fund or
account (IPA) including hedges to manage risk associated with the
minimum benefit payments, the method comprising: a. establishing
the minimum benefit payments to be provided to the customer by a
guarantor, the guarantor having a hedge portfolio; b. using capital
market inputs and variables to calculate a minimum benefit claim
fair value and at least one minimum benefit claim hedge ratio based
on the minimum benefit payment; and c. rebalancing the guarantor's
hedge portfolio to reflect the IPA, if desired.
2. The method of claim 1, wherein the minimum benefit payment is a
function of performance of customer-owned funds.
3. The method of claim 1, wherein IPA hedges includes rebalancing
one or more of index futures and index options.
4. The method of claim 1, wherein IPA hedges includes dynamic
rebalancing between equity and fixed income instruments.
5. The method of claim 1, wherein in the initial minimum benefit
payments are funded by customer-owned funds then, if the
customer-owned funds are depleted, provided for by the
guarantor.
6. The method of claim 1, further comprising repeating steps a
through c.
7. The method of claim 1, wherein the IPA is held within a separate
customer-owned fund or account.
8. The method of claim 1, wherein the IPA has an allocation and the
allocation can be rebalanced as a percent of other customer-owned
funds.
9. The method of claim 1, wherein the minimum benefit payment is a
function of a referenced fund or index.
10. A non-transient computer program product, having a computer
readable program code embodied therein, said computer readable
program code adapted to be executed by one or more computer
processors to implement a method for managing a trust comprising an
income protection account (IPA) having an asset set to hedge risk
associated with providing a protected distribution amount to
participants, the computer readable program code comprising: a. a
data collection module, for causing the computer processors to
collect data for at least economic scenario generation; b. a
valuation module, for causing the computer processors to calculate
an IPA claim fair value and to calculate at least one IPA hedge
ratio; c. a computational module for determining dynamic
adjustments to the IPA, including algorithms that adjust the IPA in
response to at least one risk sensitivity value calculated by the
valuation module, and wherein the protected distribution amount is
adjusted if the IPA claim fair value differs more than a threshold
amount, and if the protected distribution amount is adjusted,
recalculating at least one risk sensitivity to reflect the adjusted
protected distribution amount, and rebalancing the IPA to reflect
the recalculated risk sensitivity.
Description
CROSS-REFERENCE TO RELATED APPLICATIONS
[0001] This application is a continuation of U.S. application Ser.
No. 14/069,829, filed Nov. 1, 2013, which is a division of and
claims the benefit of pending U.S. application Ser. No. 12/967,920,
entitled "Methods and Systems For Providing and Maintaining
Retirement Income," filed Dec. 14, 2010, now patented as U.S. Pat.
No. 8,909,540, which claims the benefit of U.S. application Ser.
No. 12/942,952, entitled "Methods and Systems For Providing and
Maintaining Retirement Income," filed Nov. 9, 2010, now abandoned,
which claims the benefit of U.S. Provisional Application Ser. No.
61/259,350, entitled "Methods and Systems For Providing and
Maintaining Retirement Income," filed Nov. 9, 2009, the entire
disclosure of each of which is expressly incorporated by reference
herein.
BACKGROUND OF THE INVENTION
[0002] 1. Fields of the Invention
[0003] The present invention relates to methods and systems for the
provision and maintenance of risk-protected retirement income using
self-funding risk-control techniques.
[0004] 2. Description of Related Art
[0005] Defined-benefit pension plans involve the delivery of
recurrent retirement income to participants according to formulas
contained in the governing plan documents. Income amounts are
typically based on years of employment service and the
participants' compensation in years prior to retirement. The plan
sponsor operating a defined-benefit plan assumes a variety of risks
involved with assuring that promised retirement income payments can
actually be made. These risks may include those related to funding
sufficiency, uncertain investment returns of plan assets, and
realized participant mortality experience vs. mortality rate
assumptions. While stringent regulations apply to the operation of
a defined-benefit plan, many companies have found the risks and
costs associated with such plans to be burdensome, making them less
common today.
[0006] A defined-contribution pension plan, such as that enabled by
.sctn.401(k) of United States Internal Revenue Code, involves the
recurrent contribution of deposits into investment funds that grow
until retirement, when withdrawals are contemplated. While the plan
sponsor may also contribute to the fund, no specified retirement
income amounts are promised. Plan participants therefore bear the
funding, investment and longevity risk (chance of outliving one's
assets) involved with such a defined-contribution plan. The
performance of defined-contribution plans has been unsteady due to
market volatility, causing particular difficulty for participants
near or in their early retirement years.
[0007] A number of attempts have been made to remediate the risks
that a defined-contribution plan participant bears. One attempt
involves the participant's purchase with plan proceeds of an
insurance company annuity contract that promises fixed payments
over the participant's lifetime. However, annuity contracts
significantly restrict participant access to funds, reduce assets
available to beneficiaries and may not provide retirement income of
a sufficient amount. Another attempted solution involves the
introduction of guarantees in the form of guaranteed minimum
withdrawal and income benefits that provide for lifetime income. A
common guaranteed minimum withdrawal benefit (GMWB) allows the fund
holder starting at a certain age to withdraw a fixed percentage
(typically around 5%) of a guaranteed income base every year (the
guaranteed income amount). A common guaranteed income base is a
fixed percentage of the highest anniversary value of a balanced or
target-date retirement fund held inside the participant's account.
If fund assets become depleted after first taking withdrawals from
the fund, the insurer promises to make the fixed payments for the
remainder of the participant's lifetime. This benefit is provided
to the participants in the form of an insurance (annuity) contract.
These contracts provided by insurance companies subject
participants to the claim-payment abilities of the insurance
company, a third party guarantor. The ability of guarantors to
stand behind such guarantees over the full life expectancies of
participants is unknown and plan fiduciaries are reluctant to
subject all or a significant portion of their plan participants to
the claim-payment risk of one or more third party guarantors.
[0008] FIG. 1 is a schematic illustrating aspects of prior art,
most notably the use of third-party guarantors to provide
guarantees for retirement income amounts. As shown, Retirement Plan
Participants contribute to a fund that is invested in assets that
provide for the return of Contributions along with Investment
Returns. The fund pays an Annual Guarantee Fee to the Insurer or
Third-Party Guarantor. (The Guarantor in turn may hedge its
guarantee liability through transactions with Derivatives Dealers.)
If the Fund's assets are insufficient to meet the guaranteed
retirement income amount, the Guarantor makes the required payments
after the Fund's assets are depleted.
[0009] Thus, there is a need in the art for a method and system for
the creation and/or maintenance of an improved retirement income
plan.
BRIEF SUMMARY OF THE INVENTION
[0010] Embodiments of the present invention satisfy this and other
needs. In general, embodiments of the present invention overcome
problems and limitations of the prior art by providing a method and
system for the allocation, management and disposition of assets
held in a participant's retirement account, such as a defined
contribution plan, that result in the ultimate production of
retirement income in predictable and sufficient amounts. These
retirement income amounts constitute significant participant
protection from the risks of funding sufficiency, investment
performance and participant longevity. As will be appreciated by
those skilled in the art, embodiments of the invention result in an
improved retirement savings system that more safely delivers income
of sufficient amount that participants cannot outlive. Reducing
costs and controlling the risks associated with offering retirement
plans act to benefit both the participants and plan sponsors,
offering peace-of-mind to potentially millions of current and
future retirees.
[0011] In certain embodiments, the methods and systems for the
development and maintenance of a protected retirement income
amounts through the management of a Trust of retirement assets
include various combinations of the following features: [0012] (1)
the design and management of a protected minimum withdrawal,
distribution or income benefit; the benefit constitutes significant
participant protection against the risks of funding sufficiency,
investment performance and longevity risk; [0013] (2) investment
management algorithms for the acquisition, allocation and
disposition of Trust assets that contribute to the attainment of
the protected minimum retirement withdrawal, distribution or income
amounts contemplated by the benefit; [0014] (3) risk management
procedures for the acquisition, allocation and disposal of risk
mitigation instruments that contribute to the attainment of the
protected minimum retirement withdrawal, distribution or income
amounts contemplated by the benefit and that eliminate reliance
upon the undependable performance of third-party guarantors; [0015]
(4) mortality management procedures that protect against asset
depletion over the natural lifetime, or other period, of the
participant and thereby constitute significant protection against
longevity risk; [0016] (5) significant sustained exposure to equity
and fixed income markets and the long-term returns that may be
expected from them; [0017] (6) a minimum retirement withdrawal,
distribution or income benefit that may increase over time based on
the investment and risk management performance of the Investment
Advisors; [0018] (7) design variation flexibility that enables
embodiments of the invention to be distributed via various retail
or wholesale channels, in various end-consumer packaging, and under
various arrangements of fees, commissions and charges; [0019] (8) a
data collection software module for operating on one or more
processors, including an actuarial component, for compiling
relevant data; [0020] (9) a valuation software module for operating
on one or more processors, including an economic scenario
generator, to calculate fair values and hedge ratios; [0021] (11) a
computational software module for operating on one or more
processors, including management algorithms, to calculate dynamic
asset rebalancing adjustments to the Trust; and [0022] (12) a
distributed computing environment to facilitate the valuation
module for frequent trading decisions.
BRIEF DESCRIPTION OF THE DRAWINGS
[0023] The foregoing summary, as well as the following detailed
description of certain embodiments, will be better understood when
read in conjunction with the appended drawings. For the purposes of
illustrating the method and system, certain illustrative
embodiments are shown in the drawings. It should be understood,
however, that the invention is not limited to the precise
arrangements and instrumentalities shown. In the drawings:
[0024] FIG. 1 is a schematic illustrating a prior art example
providing a lifetime retirement income benefit within a defined
contribution plan offered by insurance companies through a
standalone Guaranteed Minimum Withdrawal Benefit contract.
[0025] FIG. 2 is a schematic illustrating one embodiment of the
present invention providing a retirement income benefit without the
use of a third-party guarantor.
[0026] FIG. 3 is a schematic illustrating the computerized
operating environment for one embodiment of the present invention
that would facilitate the rebalancing of trust assets to
sufficiently self-fund for the lifetime retirement income
benefits.
[0027] FIG. 4 is a spreadsheet illustrating an illustrative
scenario of rebalancing Trust assets for a one day hypothetical
market move for one simplified embodiment of the present invention
using a simple delta only hedging rebalancing approach.
DETAILED DESCRIPTION OF CERTAIN EMBODIMENTS
[0028] In one embodiment of the invention, a fund or collective
investment trust (both generically referred to as the "Trust") is
established for holding retirement assets of multiple participants.
The Trust has an explicitly stated investment objective to provide
1) exposure to equity and fixed income investments (the "Balanced
Fund Assets" as further defined below) while 2) protecting for a
minimum annual (or other) distribution amount (the "Protected
Annual Distribution Amount" or "PADA") to be distributed from the
Trust for the participant's lifetime during a distribution phase
which starts after an accumulation phase, e.g. 20 years. The Trust
may group individuals with similar ages and years until retirement,
e.g. age 45 with 20 years until retirement such that the Trust
would maintain a net asset value (NAV) and participants would own
units of the Trust similar to a mutual fund. The PADA can be
defined in any of a number of different ways, including, by way of
example, some percentage (e.g., 5%) of the greater of deposits or
the highest prospective anniversary value achieved by the Balanced
Fund Assets, as adjusted for deposits and withdrawals. Since the
PADA in this embodiment is a function of the highest anniversary
value of the Balanced Fund Assets, the PADA can only increase over
time, allowing for sustained exposure to positive market
performance. Note, the PADAs are payments from the Trust that could
exceed the actual income earned on the assets held in the Trust. It
should be understood that the PADA is a management objective
stipulated in the Trust and the targeted PADA may need to be
adjusted over time as it is subject to the payment ability of the
Trust, not a third-party guarantor. However, the self-funding risk
control techniques employed as part of the embodiment should
achieve the initially established objective with a high degree of
probability.
[0029] The self-funding techniques of pooling and combining the
market exposure, the risk protection and longevity risks directly
in the Trust for a group of individuals allow for the production of
a lifetime income benefit at significantly reduced cost compared to
prior art. Since the risk protection provided is not guaranteed by
a third party, the high costs associated with the risk margins and
capital requirements are eliminated. In addition, since the
participants own all of the risk mitigation instruments in the
Trust there is significantly improved liquidity and access to funds
compared to an insurer GMWB offering. Under an insurer GMWB, fees
are typically charged for the guarantee as an annual percentage of
the fund value. The policyholder has no access to the value of the
guarantee (which can be very large when the market is down) and
must hold the contract to maturity to receive the benefit of the
guarantee.
[0030] In the present embodiment, the majority of the Trust
deposits are invested in a "Balanced Fund Account (BFA)," which is
composed of a diversified allocation of fixed-income and
equity-market investments or financial instruments providing
exposure to fixed-income and equity-market investments that would
periodically be rebalanced to a defined percentage allocation
between equity and fixed income investments (the "Balanced Fund
Assets"), and the remainder is invested in an "Income Protection
Account (IPA)," which is composed of risk mitigation instruments
(the "Income Protection Assets"), together constituting the
"Participant Accounts". In general, the BFA may be managed with
more of a "buy and hold" strategy as compared to the IPA. The
portion of deposits allocated to the IPA is determined to
appropriately provide for the PADA payments stated in the Trust
investment objective based on actuarial assumptions and relevant
capital market variables at the time of deposit. Participants own
the Participant Accounts (i.e., BFA and IPA) and all assets may be
market-valued for participant reporting. The IPA acts as a risk
buffer protecting the ability of the Trust to pay the PADA over the
participant's lifetime. The Income Protection Assets may include
listed exchange-traded and/or over-the-counter (OTC), mainly
liquid, mainly cash-settled risk mitigation instruments of various
kinds, including for example, S&P 500 Index put and call
options of various maturities and strike levels. These instruments
may be actively managed by an investment advisor on a dynamic basis
reflecting Balanced Fund Asset performance and the changes in the
relevant capital market variables. The investment management would
adhere to explicit management objectives and instructions contained
in governing Trust documents. These investment objectives
articulate key risk sensitivities (e.g., changes in fair value with
respect to changes in capital market variables) to be maintained
within certain degrees of tolerance for the IPA.
[0031] The Investment Advisor will manage both the Balanced Fund
Account and the Income Protection Account collectively. This would
enable improved cost efficiency since the two accounts could
recognize internal offsetting effects. For example, the Balance
Fund Account could have a long position in certain equity
instruments, say an S&P 500 Index exchange traded fund (ETF).
The IPA, when the market is down, might need to enter into a short
position in the same ETF to properly protect for the PADA. Instead
of simultaneously being long the ETF in the BFA and short the ETF
in the IPA, it could simply hold the net position in the BFA. The
BFA would be tracked and accounted for as if it held the full long
ETF position.
[0032] Managing both the Balanced Fund Account and the Income
Protection Account together may also allow the investment advisor
to better protect the Trust investment objective for a Balanced
Fund Account that includes actively managed mutual funds since
shorting mutual funds is not permissible. This cost efficiency is
unavailable in the prior art since the derivative instruments
utilized by an insurer (or third party guarantor) would need to
short market index instruments most similar to the actively managed
fund. The Trust, under the present invention, could simply hold a
net position of the actively managed mutual fund in the Balanced
Fund Account, thereby avoiding significant basis risk.
[0033] The Income Protection Assets protect a retirement income
amount (the PADA) that depends upon the amount and type of assets
invested in the Balanced Fund Account. The PADA may be defined in
any of a number of different ways, including, by way of example,
some percentage (e.g., 5%) of the greater of deposits or the
highest prospective anniversary value achieved by the participant's
Balanced Fund Account, as adjusted for deposits and withdrawals.
This PADA would initially be paid to surviving participants from
the Balanced Fund Account (e.g., annually) after an accumulation
period, for example, of 20 years or in alternate embodiments when
the participant reaches a certain age. If the Balanced Fund Account
becomes depleted after paying out the PADA, the future PADAs may
then be claims payable and funded by the IPA (the "Income
Protection Account Claims"). The IPA Claims can be viewed as a
liability of the Trust with an associated fair value. It will be
understood by those skilled in the field that the IPA Claims can be
fair valued as a financial "put option" using derivative and
actuarial pricing techniques. The initial allocation to the IPA
would be set equal to the fair value of the IPA Claims. When the
fair value appropriately reflects the risks associated with the IPA
Claims, the same amount established in the IPA will be able to
self-fund the IPA Claims with a high degree of probability when
managed properly. The investment advisor manages the ability of the
IPA to pay the IPA Claims by actively adjusting the holdings of the
risk mitigation instruments in the IPA. By measuring and aligning
the directionalities and magnitudes of key risk sensitivities of
the Income Protection Assets with corresponding key risk
sensitivities of potential IPA Claims, the IPA protects for the
payment of the PADA for the remainder of the participant's
lifetime. For example, one key risk sensitivity to be maintained
within a certain range of tolerance is the delta sensitivity
(change in fair value with respect to market value changes of the
Balanced Fund Assets) of the Income Protection Assets with the
delta sensitivity of the IPA Claims. Similar fair value
sensitivities with respect to interest rates, equity-market
volatilities and other variables could be maintained.
[0034] The PADA may be adjusted (e.g., periodically) based on
actual-versus-expected mortality of the participants as a
collective group during the distribution phase. For example, if
participant mortality is greater than the assumed mortality rates
used in the calculation of the IPA Claim fair value, then the PADA
would be adjusted upward on a proportional basis and vice versa to
appropriately reset the IPA Claims fair value to be equal to the
current value of the IPA. It may also be adjusted (e.g.,
periodically) based on the actual management performance of the
IPA. For example, if following Trust inception the market value of
the Income Protection Assets exceeds the fair value of the
potential IPA Claims by a defined margin, the targeted PADA will be
adjusted upward and vice versa to appropriately reset the IPA
Claims fair value to be equal to the current value of the IPA. FIG.
4 includes a simplified example of adjusting the target PADA to
reflect the management experience of the IPA. The adjustments to
the PADA allow the participants to gauge how effectively the IPA is
protecting for the PADA before the actual PADA payments are made.
This transparency is unavailable in the prior art as participants
must hold the contract under an insurer offered GMWB to determine
whether they will actually be paid their withdrawal benefit if
their funds become exhausted.
[0035] Also in the present embodiment, participants (and their
beneficiaries) maintain a market-value ownership of all Trust
assets during the accumulation period. In one embodiment,
participants (and their beneficiaries) always maintain withdrawal
rights to the Balanced Fund Account after the accumulation period
but forfeit the value of the IPA upon death or withdrawal of the
Balanced Fund Account. The forfeiture of the IPA upon death is
designed to support remaining participants. The forfeiture upon
withdrawals is designed to prevent anti-selective withdrawals if
Participants have a changed view on their longevity perhaps due to
an illness which would then be disadvantageous to the remaining
Participants. The portion of deposits allocated to the IPA during
the accumulation phase would be set to equal the IPA Claims fair
value that would incorporate projected mortality rates of the group
during the distribution phase. The calculation of the IPA Claims
fair value assumes a certain amount of forfeited IPA balances based
on the projected mortality rates. The forfeited amounts are
utilized to protect remaining participants' lifetime payments. The
longevity protection effectuated in this fashion is self-funding
and economically efficient.
[0036] In certain embodiments, a pro-rata forfeiture of the IPA may
occur in the event of partial withdrawals of the Balanced Fund
Account only for withdrawals that are in excess of an allowable
amount of withdrawals.
[0037] In certain embodiments, several Trusts could be established
for a retirement plan sponsor program. Each individual trust would
correspond to a particular age range or years of birth. For
example, a separate trust may be for individuals born in 1970-1974,
1975-1979, 1980-1984, and the like, with the management objectives
for each trust being different to reflect remaining years to
retirement and age of participants. New Trusts might also be
established at future intervals to reflect current capital market
conditions resulting in differing initial target PADAs. For
example, if interest rates rise and other capital market variables
remained the same, higher target PADAs could be established as the
new Trust's investment objective.
[0038] In certain embodiments, one Trust could be established with
calculations of BFA and IPA values held by the Participants done on
a seriatim or individual basis. The management of the BFA and IPA
may be done in aggregate but each participant would have a separate
ownership value in the BFA and the IPA separately. This would allow
for participants to match distributions to start on their exact
retirement date and match the PADA anniversary dates to the exact
timing of their deposits. It would also potentially allow for the
voluntary withdrawal of distribution amounts.
[0039] The cash flow details of embodiments of the present
invention are set forth in the accompanying drawings and the
description below. Other features and advantages of the invention
will be apparent from the description and drawings.
[0040] FIG. 2 is a schematic that illustrates aspects of one
embodiment of the present invention, illustrating the incorporation
of an IPA within the Trust. The Income Protection Assets are held
within the Trust and owned directly by participants.
[0041] In the embodiment of FIG. 2, Retirement Plan Participants
contribute to the plan through recurrent Contributions and the
funds are deposited into a Trust. The Trust contains two
sub-accounts (or trusts): 1) the BFA and 2) the IPA. The BFA
provides exposure to equity and fixed income investments. The IPA
enters into risk mitigation transactions. Collectively, the BFA and
IPA are designed to protect a retirement income amount (e.g.,
annual distributions) after an accumulation period. The
distributions are provided directly through the Participant
Accounts, the BFA and the IPA, not through a third party guarantor,
as in the prior art depicted in FIG. 1. The Trust itself, through
the operation of the IPA, enters into the risk mitigation positions
through an Investment Advisor according to explicit management
objectives and instructions contained in governing Trust documents.
The IPA instruments are rebalanced periodically to align the key
risk sensitivities of the assets in the IPA with the IPA Claims
including but not limited to delta (changes in fair value with
respect to the Balanced Fund Assets), rho (changes in fair value
with respect to interest rates), vega (changes in fair value with
respect to equity-market volatility). These active adjustments are
designed to deliver protection of future retirement income amounts,
the PADAs. This is necessary because the risk sensitivities of the
IPA Claims (i.e., PADAs paid from the IPA) will change depending on
the evolving BFA market values, interest rates and other market
dependent variables, as well as the remaining years of the
accumulation period. Instead of relying on a third-party guarantor,
like an insurer managing a derivatives portfolio on its own balance
sheet, the Investment Advisor manages the derivatives portfolio
directly for the Trust. The Investment Advisor diversifies credit
exposure by entering into transactions with a number of Derivative
Dealers and by utilizing listed exchange traded contracts on behalf
of the Trust. The Investment Advisor earns an asset management
advisory fee for managing the Trust. The combination of the IPA
(holding the risk mitigation instruments) and the BFA provides for
Distributions, the lifetime PADAs to be paid to the Participant(s).
Distributions are made to each surviving Participant after a
designated accumulation period and are paid for by a combination of
initial Contributions to the BFA, investment returns on the BFA and
assets held in the IPA. The IPA makes whole the PADAs to the extent
the BFA becomes depleted by PADA distributions. Beneficiaries
receive as a death benefit any assets remaining in the BFA at the
time of death.
[0042] In another embodiment of the invention, the IPA is an
auxiliary account held in a separate fund or Trust (not necessarily
the same Trust as the BFA) that references a balanced fund or
index. The balance fund or index fund could be managed by a
separate investment advisor.
[0043] In another embodiment, the BFA could be a target-date or
life-cycle fund (i.e., asset allocations that change over time,
typically higher fixed income allocations as participants age) or
any combination of asset classes or investment strategies. One
embodiment might utilize only index mutual funds or ETFs.
[0044] In another embodiment, a plan sponsor or other third party
entity could provide an external guarantee for the PADA payments.
In this manner, the guarantee represents additional insurance that
the self-funding risk control techniques of the Trust deliver their
initially established objective for the PADA. The external party
would ideally not need to manage any assets to directly protect for
its obligation as the Trust itself employs the self-funding
techniques.
[0045] In other embodiments, the IPA may limit risk mitigation
instruments utilized or utilize ones beyond those discussed herein,
as may be known in the art.
[0046] In another embodiment, the PADA is paid until the death of
the participant or the participant's spouse.
[0047] In another embodiment, the Trust may pool individuals
together that were previously unrelated or unknown to each other
prior to the establishment of the Trust, together creating a
retirement group plan.
[0048] In another embodiment, the Trust may invest 100% of the
Participant deposits into Balanced Fund Assets and borrow amounts
to be utilized as Income Protection Assets. The borrowed amounts
could be paid back over time from the Balanced Fund Assets charged
as an ongoing fee.
[0049] In another embodiment, the PADA is paid for a fixed period
of time such as 20 years. The period of time could be set to
approximate life expectancy of the Participant. In this embodiment,
the Participants would not necessarily be required to forfeit IPA
amounts upon death. In the event of death of the Participant prior
to the end of the fixed period, the Participant's beneficiary may
receive the full value of the Trust (BFA and IPA amounts) or may
elect to continue to hold the Trust and receive continued PADA
payments through the end of the fixed period.
[0050] Another embodiment of the invention utilizes a managed
account platform where individuals maintain ownership rights in a
separately managed account, rather than shares of a Trust.
Participants could invest qualified tax-deferred money, such as
Rollover IRAs, or non-qualified money. The managed account platform
would facilitate trading, custody, valuation, reporting, liquidity
and transparency. The Investment Advisor would perform portfolio
trading and risk management of the client accounts. The trading
activity dictated by the management of the BFA and IPA may entail
1) calculations performed on an individual basis, 2) trades
aggregated and executed at a master account level and 3) trades
allocated to the Participant's separate managed accounts according
to the individualized calculations. If done in this manner,
Participants could receive the benefits of reduced commissions due
to the aggregation and scaled execution process.
[0051] In another embodiment, the Income Protection Assets and
Balanced Fund Assets consist solely of equity, fixed income and
money-market securities or equivalents and are actively adjusted to
achieve the Trust investment objective. Active rebalancing
adjustments are made to assets to align the resulting
directionalities and magnitudes of the key risk sensitivities,
delta, of the IPA with those of the IPA Claims. This type of
program is known in the industry as a "delta only" approach. Such
adjustments may include, for example, holding less equity and fixed
income instruments or being short equity and fixed income
investments in an effort to protect for the PADA on a dynamic
rebalancing basis. Note that in this embodiment Income Protection
Assets may not include index options or other "derivative" risk
mitigation instruments. As a result, the targeted PADA would
potentially be subject to more frequent and/or larger
adjustments.
[0052] In another embodiment, when the IPA as a percent of the
total Trust values become significantly different from its initial
allocation, it could be reset to the starting allocation with the
target PADA adjusted accordingly to reflect the rebalanced mix
between BFA and the IPA. Similarly, in another embodiment any gains
or losses with respect to managing the IPA against the IPA Claim
fair value could be supported by rebalancing the mix between the
BFA and the IPA instead of solely adjusting the target PADA to
reflect for the gain or loss.
[0053] FIG. 3 illustrates various computer software modules and
inputs to such modules (e.g., workflow) that would be used by the
Investment Advisor to determine dynamic rebalancing of the
instruments held in the IPA. As will be understood by those skilled
in the art, such modules may be stored in local or remote computer
readable medium (e.g., ROM, RAM, optical disk, network storage,
etc.) which is in communication with one or more computer
processors (such as of one or more personal computers or servers)
operated by the Investment Advisor, which operate in accordance
with the modules to access an electronic database or tables in
local or remote electronic memory (e.g., ROM, network storage, RAID
arrays, etc.) and perform the functions described throughout.
Illustrative modules and their components include: [0054] a data
collection module, including an actuarial component, [0055] a
valuation module, including an economic scenario generator for
calculating fair values and fair value risk sensitivities (i.e.,
hedge ratios), and [0056] a computational module for determining
the dynamic adjustments to the Income Protection Assets. Although
other module configurations may be used, those skilled in the art
will appreciate that the foregoing illustrative modules and
components provide an effective and efficient means of providing
the functionality and achieving the benefits described herein.
[0057] A data collection module comprising a market data collection
component, a participant data collection component and an actuarial
data component may be used. The participant data collection
component compiles data from upstream administrative computer
systems (e.g., via a network or other communication link) regarding
each Participant Account's holdings and demographic data, which
permit the valuation module to calculate the necessary values
including, but not limited to, fair values and hedge ratios that
may be required. The market data collection module compiles current
relevant market variables, including security values, interest
rates and implied volatilities that are used in generating the
economic scenarios used in calculating the fair value and hedge
ratios for the IPA Claims for a given point in time.
[0058] The actuarial component of the data collection module
includes assumptions about Participant behavior relating to
mortality rates, Trust elections (e.g., withdrawal rates and
deposit rates) and Trust attributes (e.g., expenses, fees and
charges). These assumptions are used in the valuation module to
calculate the IPA Claims for each scenario of a Monte Carlo
simulation. In addition to data elements related to the actuarial
component, predictive assumptions about future participant behavior
may be used in the valuation module. The behavioral assumptions may
consist of business rules such as "if, then" procedures or more
complex formulas implemented by the computer processors. Table 1,
below, includes illustrative data elements related to Participant
data used in accordance with various aspects of the embodiments,
which may be stored in a database in electronic memory for use by
the processors.
TABLE-US-00001 TABLE 1 Item Description Total Trust Value Amount
The total market value of the Trust Trust Fee Amounts The expenses,
charges and fees related to running the Trust including the fees
associated with the Balanced Fund Account and the Income Protection
Account Balanced Fund Account Value The market value of the
Balanced Fund Account Income Protection Account The market value of
the Income Value Protection Account Balanced Fund Account Highest
The value of the Balanced Fund Account Anniversary Value on the
highest anniversary date since Trust Inception Current PADA The
retirement income amount to be paid as a distribution after the
accumulation period Length of Accumulation Period The remaining
time to distributions of the PADA Age of Participant The age last
birthday Participant Gender A male or female indicator
[0059] The economic scenario generator enables determination of
risk positions by generating multiple scenarios of possible future
events (e.g., Monte Carlo simulations). Those skilled in the art
will realize that very many scenarios may be necessary to achieve
desired and appropriate levels of confidence in results. For
example, in certain embodiments the number of scenarios that may be
used may range from 10,000 to 100,000 depending on the requirements
of the activity and the capacity and performance of the applied
computer system. As is known generally, a suitable number of
scenarios may be determined by running tests to determine how many
scenarios are required to show an acceptable degree of convergence
in the results without exceeding an available level of computing
resource usage.
[0060] The economic scenario generator may use any number and
variety of capital market inputs depending on which inputs are
deemed necessary or relevant to the modeling utilized, which may
include the generation of a set of risk-neutral Monte Carlo
scenarios. Capital market inputs, including, but not limited to,
interest swap rates, credit spreads, index values, fund prices,
currency rates, market index correlations, cash repo rates and
volatility of all capital market variables may be utilized. Those
skilled in the art will realize that numerous different inputs or
indicators may be used depending on the particular modeling being
undertaken.
[0061] Table 2 identifies illustrative capital market inputs and/or
market data that may be used as input to the economic scenario
generator. In general, such indicators or market data may include
any indicator or market data that permits the calculation of
necessary fair values and hedge ratios.
TABLE-US-00002 TABLE 2 Treasury Yields--various maturities Credit
Spread--various ratings USD LIBOR Swap rates--various Equity index
implied volatilities-- maturities various maturities and strikes
Equity market index values--such Bond index implied volatilities--
as S&P500, NASDAQ, Russell various maturities and strikes 2000,
Nikkei, etc . . . Bond market index values Interest rate swaption
prices Inflation rates Index correlations GDP Growth Rate FX
implied volatilities FX Rates Any indicator or data based on any
one or more of the above items listed Market value of securities
held in Eurodollar Futures of various the BFA maturities
[0062] The valuation module utilizes the scenarios produced by the
economic scenario generator (the results of which may be stored in
and accessed from memory) in order to calculate fair values and
hedge ratios associated with the IPA Claims. The valuation module
employs known mathematical modern finance routines, such as
projected IPA Claims and calculating net present values. The
valuation module would calculate the present value of the IPA
Claims for each scenario of the Monte Carlo Simulation. The
valuation module may then average and store in memory these present
values to determine the fair value of the IPA Claims. The same
process would be performed for changes in the capital market
variables to determine the IPA Claims sensitivities to the capital
market variables (e.g. vega and rho). This is accomplished by
changing one of the capital market input variables and
recalculating an associated IPA Claims fair value. These
sensitivities, commonly called hedge ratios, are inputs to the
computational module that embodies the management algorithms that
the Investment Advisor uses to determine the active adjustments to
be made to the holdings of the risk mitigation instruments in the
IPA. While the Monte Carlo simulation approach is a common
numerical method, it should be noted that there could be other
numerical methods utilized to calculate the IPA Claims fair value
and hedge ratios.
[0063] The computational module embodies the management algorithms
that the Investment Advisor uses to actively adjust (i.e.,
rebalance) the holdings of the risk mitigation instruments in the
IPA in response to the actual IPA Claims hedge ratios as calculated
by the valuation module. For example, assuming all other variables
constant, a drop in the value of the BFA will result in a lower
calculated delta. The IPA would appropriately need to start
protecting for a potential PADA shortfall since the BFA value is
lower and less likely to fund the target PADA objective. Thus, the
rebalancing of the IPA would need to reflect the change in delta
and reduce (or short) its exposure to assets similar to the BFA.
For example, under a delta only hedging program, the IPA
rebalancing would simply contemplate a smaller or even short
position in the BFA assets. Active rebalancing adjustments to the
IPA on a more detailed basis and including the protection against
other sensitivities are made pursuant to explicit management
objectives and instructions. This is intended to ensure that Trust
assets can fund the PADA according to a desired degree of
confidence, reflecting a reasoned trade-off between trading cost
and accuracy.
[0064] FIG. 4 is a spreadsheet illustrating an example of
rebalancing the Trust assets for a one day hypothetical market
scenario. For simplicity, the example shows a simple delta-only
hedging rebalancing approach. The example is further simplified by
using only one security, a balanced fund ETF, held in the BFA. An
initial deposit of $100,000 is bifurcated into an $80,000 deposit
into the BFA and a $20,000 deposit into the IPA. Using the
simplified actuarial and participant data assumptions, the $20,000
fair value of IPA Claims (calculated via the valuation module) is
for a PADA equal to $4,400. The PADA will reset each anniversary to
5.5% of the greater of the $80,000 deposit or the highest
anniversary value of the BFA. Also, using the simplified assumption
set, the valuation module calculates a dollar delta of $13,000. In
other words, for every one percent (1%) move up or down in the
balanced fund ETF, the IPA Claims fair value would similarly change
up or down, respectively, by approximately $130 (=0.01*$13,000) The
initial IPA portfolio consists of $13,000 worth of the balanced
fund ETF (to hedge the dollar delta of IPA Claims) with the
remaining $7,000 allocated to a money market fund. Under the
scenario depicted, the balanced fund ETF is assumed to drop by 5%
(an extreme movement for illustrative purposes only) over the
single-day period. After the market drop, the market value of the
IPA is $19,350. The PADA that can be protected by an IPA worth
$19,350 is calculated to be $4,395. This value is the unique PADA
amount in the valuation module that results in an IPA Claims fair
value equal to the IPA market value. The resulting dollar delta
from the valuation model using the new adjusted PADA is $10,000. As
a result, the balanced fund ETF position in the IPA needs to be
rebalanced to align the dollar delta of the IPA Claims with the
IPA. Thus, $2,350 is sold of the balanced fund ETF and used to
purchase $2,350 of a Money Market Fund, resulting in a balanced
fund ETF position in the IPA worth $10,000. This process would be
repeated periodically until the ultimate disposition of Trust
assets. In this example, the PADA is adjusted downward because the
market move was very large (e.g., 5%) compared to the volatility
assumption utilized. Other IPA instruments such as options on the
balanced fund ETF can be utilized to reduce this risk, typically
referred to as volatility or gap risk. Also note, the initial delta
is positive because the value of the IPA Claims increases when the
BFA goes up in value. This is a result of the highest anniversary
value protection feature of the PADA. In scenarios in which the
market is down a relatively large amount, the delta would turn
negative and short positions in the balanced fund ETF would
ultimately be required in the IPA.
[0065] The management algorithms of the computational module define
specific steps to be undertaken by the Investment Advisor for the
acquisition, allocation and disposition of Trust assets that
contribute to the attainment of the PADA. These steps depend upon
any of a number of factors, including the relevant fair values and
hedge ratios of the Accounts, the prevailing capital market
conditions, and the particular experience and expertise of the
Investment Advisor. Individual algorithm steps may affect or
consider any one or more of the following (and/or other) factors:
[0066] the individual holdings of risk mitigation instruments;
[0067] interaction between the Income Protection Assets and
Balanced Fund Assets; [0068] outlook for macroeconomic and capital
market performance; [0069] particular risk attitudes the Investment
Advisor may hold; [0070] impact of trading costs; [0071] asset
rebalancing triggers and frequencies; and [0072] relevant
regulatory compliance.
[0073] The management of the Trust can be summarized in the
following procedures and steps:
[0074] Actuarial assumptions are set. These would not be
anticipated to change often unless observed mortality experience,
generally recorded over years, is determined to be sufficiently
different than the assumed mortality rates used in the IPA
calculations,
[0075] Participant Data is collected. New participants or
additional contributions are added to the existing Participant
database and partial withdrawals are recorded,
[0076] Capital market variables and inputs are received. These
inputs could be captured from live data feeds,
[0077] The economic scenario generator would be run to produce the
scenario set that would be used in calculating the IPA Claim fair
value and hedge ratios,
[0078] The IPA Claims fair value would be calculated via the
valuation module utilizing the scenario set generated by the
economic scenario generator,
[0079] The targeted PADA would be adjusted if the IPA Claim fair
value differed significantly from the value of the IPA. It would be
adjusted to reset the IPA Claims fair value to be equal to the
actual value of the IPA.
[0080] The IPA Claims hedge ratios and sensitivities would be
calculated to reflect the new PADA,
[0081] The IPA assets would be rebalanced to reflect the IPA Claims
hedge ratios and align the sensitivities. The IPA asset adjustments
would be determined by the Investment Advisor within the risk
guidelines established,
[0082] The payment of fees would be assessed and paid to the
Investment Advisor and any other third party administrators on a
regular basis such as daily, monthly, etc.,
[0083] The BFA would be rebalanced if warranted. The BFA would be
rebalanced on a periodic basis, such as quarterly and/or if the
asset allocation differed significantly form a desired asset
allocation,
[0084] Actual payments of PADA would be made if warranted. The PADA
payments would be made on specific date stipulated in the Trust
documents, and
[0085] This process would be routinely monitored on a regular basis
and repeated, for example, in the event of any significant change
to any one of the participant data/capital market variables,
collection inputs, or changes in actuarial assumptions.
[0086] It is to be understood that the present invention is not
limited to any single set of factors or management algorithms, such
as those described above, and that the creation and implementation
of additional related algorithms are contemplated as being within
the scope of the present invention. These additional algorithms
might respond to observations reached during ongoing management of
the Participant Accounts and act to improve or make more efficient
future management actions.
[0087] Another aspect of embodiments of the invention, a
distributed computing environment may be used to manage the
processing of tasks (or the aforementioned modules) over a
distributed computing infrastructure which may comprise multiple
processing units and electronic databases to maximize efficiency
and cycle time. The distributed computing management module may
utilize "grid" computing in order to speed computations.
[0088] The distributed computing environment may include a network
of interface units and drives for reading and writing data or
files. The term "network" as used herein should be broadly
interpreted to include not only computer systems in which remote
storage devices are coupled together via one or more communication
paths, but also stand-alone devices (e.g., servers or personal
computers) that may be coupled, from time to time, to such systems
that have storage capability. Consequently, the term "network"
includes not only a "physical network" but also a "content
network," which is comprised of the data--attributable to a single
entity--which resides across all physical networks.
[0089] While the invention has been described with respect to
specific examples including presently preferred modes of carrying
out the invention, those skilled in the art will appreciate that
there are numerous variations and permutations of the above
described methods and systems (including modules and algorithms)
that readily fall within the spirit and scope of the invention.
[0090] Those skilled in the art will also recognize that the
methods and systems of the present invention have many
applications, may be implemented in many manners and, as such, are
not limited to the foregoing exemplary embodiments and examples.
Moreover, the scope of the present invention covers future
variations and modifications that would be understood by a skilled
observer to be in keeping with the spirit and intent of the present
disclosure and invention.
* * * * *