Dollar Cost Averaging (DCA) and Enhanced Dollar Cost Averaging (EDCA)

Objectives By the end of the session you will be able to: Define DCA Describe how DCA works Define EDCA Describe how EDCA works Describe how the program is affected by optional riders IFS-A129460

Objectives Describe the effect a subpay has on DCA and EDCA programs Identify and resolve Not In Good Order (NIGO) issues Set up both DCA and EDCA in VPAS IFS-A129460

What is Dollar Cost Averaging (DCA)? Allows the investor to systematically move money from one investment option to another Usually investors move from conservative investments to more aggressive investments to reduce their risk This is an optional program that is offered to our investors at no additional cost Money can be moved from one sub-account into one or more other sub-accounts This is a way for the investor to start out in a more conservative fund and slowly move money into a more aggressive fund This enables the investor the ability to regularly invest regardless of the current unit value or price in the investment options they select A unit is a an individual piece of the sub-account you are purchasing. Ex. Stocks you buy shares, annuities you buy units DCA program allows the investor to purchase more units when prices are low and fewer when prices are high. In dollars here is an example: (use whiteboard for following example) Ex. Client buys 1 unit at $70, 1 unit at $30 and 1 unit at $55 the total is $155. With DCA the price would be $51.67/unit. Another Ex. Assume you transferred $100 from one investment option to another every month for 6 months. Be investing on a regular basis through periods of fluctuating prices, this example shows that you would have lowered your average cost per unit in comparison to the average price per unit. Investment Amount Annuity Unit Price Units Purchased $100 $20.00 5.0 $100 $12.00 8.3 $100 $10.00 10.0 $100 $8.00 12.5 $100 $5.00 20.0 $100 $15.00 6.7 Total: $600 $70.00 62.5 Average/unit Price Average cost/unit $70/6=$11.67 $600/62.5=$9.60 TTL units/# of unit TTL cost/TTL units IFS-A129460

Benefits to Investor Over time the average per unit cost should be lower than either the market high or the average price May decrease the effect of market fluctuation on the investment of the purchase payment However there is no guarantee that DCA will result in a profit or protect against a loss in a declining market. IFS-A129460

Transfer Options Listed on Application Three transfer options: Single Sub-Account (Flat Dollar Amount) Earnings Only Earnings Plus Principal ***NEW POLICY***** ANYTIME DCA IS ON AN APPLICATION THE PROCESSOR MUST GO TO THEIR TA FIRST PRIOR TO SET UP OF THE PROGRAM (To promote consistency in set up. As there have been a wide variety of answers on any given issue. If not set up correctly can result in slippage) ADD NOTE TO CFE: “SPOKE WITH TA REGARDING DCA SET UP” AND ADD THE TA’S NAME TO THE NOTES There are 3 options the investor has to chose from when selecting how they want their money moved out of the investment We will look at these 3 in more detail next FIXED FUNDS NOT AVAILBLE W/ FLAT DOLLAR AMT OPTION (Single Sub-Account) IFS-A129460

Single Sub Account (Flat Dollar Amount) A specific dollar amount or specific percentage moved out of the sub-account Can only be moved from variable sub-accounts and only into variable sub-accounts If percentage is selected on application call out for a duration VPAS: Transfer Type = A (If dollar amount is written on app) The investor chooses how much they want coming out of the fund and when this amount will come out. Ex. $10,000 monthly from AST Money Market for dollar amount 100% monthly from AST Money Market for percentage The dollar amount listed on the application is the amount the FP wants transferred out of that sub-account at the frequency listed until the sub-account has no more money in it and all is transferred to the new sub-account. This is indicated on the optional administrative form as the top box. Must have a duration only if percentage is chosen on application. If no duration specified a call out needs to be made. No fixed funds at all allowed with this option. IFS-A129460

Earnings Only Moving only earnings from a specific sub-account Can be moved from a fixed or variable sub-account Can only be moved into variable sub-accounts If no duration is provided, the program runs indefinitely VPAS: Transfer Type = E Earnings only = growth only from that specific sub-account The fixed options are 1, 2, or 3 year rates For fixed accounts - The DCA period may only begin with the same date as the initial or renewal date of the existing fixed rate period and must match the duration. Ex. Initial bucket date is June 4, 2000 on a 2year fixed rate. DCA may only begin on June 4, 2000 or with the renewal date on June 4, 2002, June 4, 2004, etc and MUST run for 2 years. The program does not need a duration. Only way to cancel at that point is for investor to call in and cancel program. IFS-A129460

Earnings Plus Principal Moving earnings and principal from a specific sub- account Can be moved from a fixed or variable sub-account Can only be moved into variable sub-accounts Variable sub-account needs a duration VPAS: Transfer Type = G The fixed options are 1, 2, and 3 years. Investor can’t DCA into a fixed fund only variable. If no duration is selected then a call out needs to be made to the FP. If the “from” fund is the same as one of the “to” funds then a call out needs to be made to the FP for instructions as they are not allowed to DCA out of and into the same fund. (If an FP says “Just fix it so it equals” then the spreadsheet is needed). IFS-A129460

Restrictions to DCA Auto Rebalancing Third Party Investment Advisory (TPIA) LPL Asset Allocator Morningstar (MSAA) LT5, SLT5, HD5, HDV 72(t) The fund restrictions that are on the optional riders also apply to DCA. Can be used with GRO Plus as long as you are not not using a fixed fund – only variable. Can be used with LT5, SLT5, HD5 and HDV as long as the “to” and “from” fund are the 7 dynamic allocation models you can use with those benefits. Can not be used with TPIA. Can not be added to MSAA. For LPL – Can not have DCA with OAP models. For 72t – the DCA runs first then 72t can run after. The DCA must run for at least 1 cycle in order for the 72t to start. Clone the ppwk to Reallocations and add a note in the clone stating to set up auto rebal after DCA is complete. IFS-A129460

DCA Requirements Transfer From Fund Frequency of the program Sub Accounts to be transferred into Duration is needed for flat dollar amount when percentage is provided “From” fund can not be listed as a “to” fund If any of these are not completed then DCA is NIGO and a call out needs to be made to the FP for clarification. We will look at NIGO in a few minutes ALL DCA INFORMATION CAN BE TAKEN OVER THE PHONE. ***NOTE: “From” fund can not be listed as a “to” fund IFS-A129460

Subsequent Payments (sub pays) for DCA For money coming in: If default allocations are variable sub-accounts that are part of a current DCA program, then the money feeds directly into the existing DCA program. No need to set up a new program If default allocation is a fixed sub-account, you must determine if sub pay is part of initial premium Yes – set up new program No – Discuss with your TA Default allocations = what’s on the contract details screen in VPAS.(which have come from original application and updated by sub sequential investor trades or reallocations). You may receive checks in minimal amounts mention this to your TA at the time of consultation. IFS-A129460

What is Enhanced Dollar Cost Averaging (EDCA)? Allows the investor to systematically move money from the DCA6 or DCA12 funds into other investment options DCA 6 or DCA12 receive a higher interest rate Program will always start the next business day Money automatically comes out on as Earning Plus Principal on a monthly basis Available on APEX2 and ASAP2 only Read Slide The period of time is determined by the fixed account the money is being transferred from. EDCA begun as a promotion and has continued for these two products. ***NOTE: Not available on ASAP3 only ASAP2 For New Business EDCA is only available on APEX2 IFS-A129460

Restrictions on EDCA Only available on APEX2 and ASAP2 Not available with GRO+, LT5, SLT5, HDV, and HD5 Based on State Availability Can not have Third Party Investment Advisory (TPIA) with EDCA If application reflects these options set up EDCA and clone to the appropriate business unit: Auto Rebalancing 72(t) Required Minimum Distribution (RMD) Only available on AP2 and AS2 as these products can offer a higher rate on the fixed accounts. Not available with LT5, SLT5, HDV, and HD5 as these programs must have the Dynamic funds. Can’t have DCA6 or 12 Handout State Availability Table IFS-A129460

Paperwork Requirements Enhanced Dollar Cost Averaging Enrollment Form Program Selection (6 or 12) Investment Allocations Signatures of client and FP If any of these are not completed then EDCA is NIGO and a call out needs to be made to the FP for clarification. Do not need to have correction faxed in. DCA 6 and 12 are fixed funds that are only available with EDCA. Investor is not able to trade into these funds specifically and are only available before the funds go in. Not able to do anything with EDCA until the signed enrollment form is received. Once the signed enrollment form is received then you can take any information over the phone. EDCA can not be added after the contract is issued unless it is new money coming in. Can’t be added to existing money in the account. We will look at NIGO in a few minutes IFS-A129460

Subsequent Payments (Subpays) for EDCA Money coming in, is applied according to default allocations If default is DCA6 or DCA12 another EDCA program must be set up Can have multiple programs running at any given time When a DCA program is currently running and a subpay arrives and goes into a fixed fund (DCA or EDCA) a new program must be set up for those funds If multiple checks are received on the same day a separate program DOES NOT need to be set up for each check. The default allocations = what’s on the contract details screen in VPAS (which have come from original application and updated be sub sequential investor trades or reallocations). For ALL sub pays – allocations will go to the default allocations unless the FP provides different instructions. DCA program must be set up next day for all sub pays. EDCA program can be set up same day as sub pay is remitted. If DCA program is done running and we receive an additional check then a call out needs to be made to FP to obtain allocations. IFS-A129460

Not In Good Order (NIGO) All information relating to DCA or EDCA can be taken over the phone if the FP has the correct authorizations If fixed funds are listed on application in the “to” funds section a call out MUST be placed to FP for new allocations REMEMBER: WHEN YOU ARE PROCESSING YOU MUST START WITH YOUR TA. Here are some of the rules: All missing information can be taken over the phone as long as he FP has the correct authorizations. The program information can be written anywhere on the application. They do not need to supply an enrollment form. EDCA is the only program that needs an enrollment form. For EDCA all changes can be made over the phone as long as the client had signed the original EDCA form which has the program disclosures on it and FP has correct authorizations For the single sub account set up if the duration is not chosen then a call out needs to be made to obtain an end date or duration. Don’t hold up processing put money through and don’t set up the program. DCA can be set up at anytime. ALL CALLOUTS MUST BE DOCUMENTED CLEARLY AND ACCURATELY IFS-A129460

Summary In this lesson we discussed: How DCA and EDCA work Difference between DCA and EDCA How programs benefit the investor Required paperwork IFS-A129460

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