A new retirement investment platform has launched that's being sold as a tool for managing longevity risk through a pooled equity index fund.
Boulder, Colo.-based Savvly, which launched more than a year ago, said its platform is designed to allow investors to put 5% to 10% of their portfolio into an investment pool that is held by a limited partnership and invested in the Vanguard S&P 500 ETF.
"When a Savvly investor reaches their own payout date, their account gets access to an amount equal to the index fund’s value of their account—plus their share of the longevity pool created from the forfeitures of the other investors who leave Savvly before their own payout," the company said when it announced the product in December.
The earliest payout date allowed is for men set at age 70 and for women aged 75, the company added.
“Our new retirement focused platform utilizes the same risk-pooling concept behind most annuities, pension plans, and Social Security, but adds the returns of the stock market and the tax efficiency of a Limited Partnership," Dario Fusato, Savvly’s co-founder and CEO, said in a prepared statement. "We have adapted this concept so accredited investors and their financial advisers can take advantage of its features as part of their retirement planning and estate management."
Explaining the structure of the product further, the company said that investors who hit their payout ages benefit from investors who pass away or withdraw early. Savvly investors also have the option of requesting an in-kind transfer to their brokerage and take advantage of the tax benefits of a limited partnership, the company said. Investors can also decide to extend the payout date into the future.
“We’re building a self-funded pension that provides late-life payouts,” said Fusato. “With a tiny fraction of your investment, you’ll [have] a huge late-life return that guarantees you from longevity risk.”
The firm does not have custody of those assets, instead they are held with an SEC-registered independent custodian, the firm said.
From there, clients select specific ages when they will receive lump sum payments, which is the value of the ETF at the time plus additional funds collected via forfeitures others pay when they leave the partnership. The client will receive only one payment that year with several years before the next payment, the company said. If the client does not select the dates, the firm will do it for them.
If the firm selects the dates, it has a standard option in terms of payout ages that will be five years apart. Under these conditions, men can start receiving payments at 75 and women can start receiving payments at 80.
The firm has contingences in place should a client decide to withdraw their money prior to their payout date or if they pass away.
“If you die or walk away in the first two years, you just get the entire investment plus or minus the appreciation of the money,” Fusato said. “After two years, but before your payout age ... you are going to leave some money to the pool.”
Specifically, the estate receives 75%, plus 1% for every year with Savvly, applied to the lesser of either the initial investment or current market value, Fusato said. While the rest of the pool will receive the balance of the initial principle investment plus any increased value of the fund. That amount is then incorporated into the overall fund.
“Everything else—excluding a small transaction fee—is reallocated into the pool so that they increase the returns,” he said. “This is very similar to what happens with annuities but what we’re doing with this is increasing the returns of everyone else.”
A client is subject to a forfeiture penalty if they pull their money out or pass away after two years. The firm is considering waiving that penalty for those who pass away beyond two years for a fee, but no decision has been made yet, Fusato explained.
The firm is working toward getting more investment options than the Vanguard ETF, including additional ETFs and mutual funds, Fusato said. He is hoping to have more options by the end of the year.
Currently, the platform has two funds available for accredited investors and qualified purchasers. The first one has a $10,000 minimum and a $100,000 maximum and is for accredited investors only. The second, which is available to both accredited investors and qualified purchasers, has a $100,000 minimum and a $300,000 maximum, the firm said.
The fee structure for the plan is 30 basis points for investments of more than $100,000 and 50 basis points for those with less than $100,000, according to Fusato. Additional fees include any advisory fees, Savvly’s fee and the management fee of the underlying ETF investment, the firm said.
Savvly’s ultimate goal is to bring the platform to the retail market by the end of this year or beginning of next year, Fusato said. When that happens, he envisions taking the minimums down to as low as $10.
“We are trying to make a really good product that mitigates longevity risk and helps on the accumulation that is available for all people [from] the guy who is worth $5 million to the guy who is worth $50,000,” he said.
Beyond bringing the platform to the retail market, Fusato would also like to see it as an option within a 401(k) plan. In that structure, it would work similarly to other investment options that are part of a plan and not encompass the entire plan. He is hoping to get that by the middle of next year.
The concept of Savvly is one that Fusato has contemplated for years. Despite not being poor, he still became “terrified” in his early 40s that he would have enough money to retire. He began to live his life frugally, which for him meant spending less than what he could easily afford. Fusato, who hails from Northern Italy, saw that what Europe was doing with their pension plans, and what the U.S. was doing with its Social Security program wasn't enough for retirees.
Fusato concluded that the industry needed a solvent solution that was market-driven so investors can be guaranteed a return on their investments.
He managed a similar data-driven approach when he served as managing director at Arthur J. Gallagher & Co., a global insurance broker based in Rolling Meadows, Ill. Prior to that he was a chief operating officer and senior vice president at Aon Plc in Chicago.
“We would like to provide financial dignity to anybody,” he said. “Because the entire world tells people you should save more, but a vast majority of Americans can’t save more [and] they need to optimize the little amount of money that they have.”