|
From Resource,
April 2007
Copyright by LOMA
Building
a Better Retirement
Innovative
financial services companies are giving Baby Boomers the tools to create a
personal pension plan—as it turns out, just in time.
By
Jennifer C. Rankin
As
the Baby Boomers enter their retirement years, financial services companies are
on the cusp of a multi-trillion dollar opportunity to gain assets by providing
efficient and effective retirement income solutions.
The stakes are high. According to the new TowerGroup report Winning
the
Battle
for Retirement Assets, the challenges inherent in retirement income
planning and asset decumulation will compel many
U.S.
households to consolidate assets with a single advisor. The opportunity for
financial services players to gain or lose assets is significant. Retirement
assets in various plan types under the control of individual investors in the
United States
total US$ 9 trillion, with business liquidation over the next decade possibly
placing another US$ 10 trillion on the table.
According to TowerGroup, the retiree market is far from
monolithic with respect to income planning, so it’s vital to understand the
unique requirements of three major market segments and the opportunities each
presents. The mass market, largest by far in terms of number
of households, will focus on asset protection and shifting assets into vehicles
that generate income with manageable risk to principal. The affluent market will
be interested in structured asset drawdown strategies balanced with a
personal risk management program. And the high-net-worth crowd will look for
programs that blend and balance lifestyle and legacy.
TowerGroup believes competitive advantage will flow to
financial services companies that successfully address their customers’
finances and expectations. Some will move from mass market to affluent to
high-net-worth, then back through the segments as retirement progresses and nest
eggs get depleted. Some will never achieve mass market status, others will never
move beyond it. They all need retirement income. In the battle for consolidation
of household assets, the winning formula, says TowerGroup, will be independent
and objective advice offered by distributors such as smaller registered
investment advisors as well as financial services companies that provide advice unencumbered by proprietary product sets.
Many trends have converged recently to create the nascent
retirement income market (see “Forever Young”, Resource,
April 2006). Demographic change is the most important of these. The first of the
Baby
Boomers, who were born between 1946 and 1964, turned 60 last year;
according to the MetLife Mature Market Institute, this demographic group is 77
million strong and has an estimated annual spending power of US$ 2.1
trillion. In addition, corporate
America
has begun to eliminate benefits that contribute to retirement security, such as
defined benefit pension plans and retiree health care, for everyone except the executive class. President
Bush wants to privatize Social Security, which is underfunded, and replace
tax-advantaged retirement products, many of which are sold by insurance
companies, with federal savings accounts.
In the midst of all this change, Congress passed new
retirement legislation in August 2006, which President Bush then signed into
law. A bipartisan measure aimed at boosting retirement security for Americans,
The Pension Protection Act of 2006 shores up the Pension Benefit Guarantee
Corporation (PBGC)—that is, the federal pension insurance system—as well as
removes barriers that prevent companies from automatically enrolling
their employees in defined contribution plans; ensures that workers have more
information about the performance of their accounts; allows for greater access
to professional advice about investing for retirement; gives workers greater
control over how their accounts are invested; and makes permanent the higher
contribution limits for IRAs and 401(k)s that were passed in 2001, enabling more
workers to build larger retirement nest eggs.
Although the retirement income market promises to be
lucrative, it is not without challenges.
For starters, competition is intensifying.
Everyone—insurers, banks and brokerages—wants a piece of the retirement
income pie.
In addition, President Bush has lots of ideas about
retirement that could have a significant impact on business if they’re
implemented before he steps down. During his six-year tenure, he has
continuously advocated replacing every sort of tax-advantaged savings vehicle on
the market—including education accounts, health savings accounts, IRAs,
401(k)s and flexible spending accounts—with three simpler plans, each of which
would grow tax free. Save at Work Accounts would replace 401(k) and other
employer-sponsored retirement plans. Save for Retirement Accounts would replace
IRAs, deferred compensation such as stock options and other retirement plans.
Save for Family Accounts would replace myriad college savings, health care and
flexible spending accounts. Thus far, Congress has thwarted his plans.
Product fees are another challenge—both their opacity
and amount. The loads embedded in 401(k) plans, variable annuities and target
date mutual funds continue to get bad press—and generate consumer caution.
In addition, many outside—and inside—the financial
services industry believe traditional retirement products are unnecessarily
complex and outright inadequate.
Although the Pension Protection Act of 2006, with its
emphasis on automatic enrollment and higher savings caps, gives defined
contribution programs a big boost, financial services companies will need to do
more than trot out familiar products to capture rollover retirement assets,
according to American Banker analyst Matt Ackermann,
who traveled to Boston for the February 2007 Managing Retirement Income
conference. Executives at the meeting said financial services companies must
blend investment and insurance products in their portfolios. “The combination
of insurance and investment solutions is more powerful than insurance-only
solutions or investment-only solutions,” according to Garth Bernard, a vice
president with MetLife’s retirement strategies group.
Everyone at the meeting agreed that customers preparing
for retirement want a steady stream of dependable income, asset protection and
simplicity. Among the possible solutions presented at the meeting are holistic
advice; programs that emulate defined benefit pensions plans,
such as MetLife’s Personal Pension Builder; less complex annuity products;
tactical, versus static, asset allocation products; and a new generation of
products that blends guarantees with flexibility. As John Bahnken, the president
of Bank of America’s global wealth and investment management’s products
group, summed it up, “We have a long way to go before we are delivering
everything our clients really need for retirement.”
Brand Name
As
you can see, the retirement income market isn’t for sissies. This hasn’t
stopped forward-thinking financial services players, however, from positioning
themselves for the game of a lifetime, if the recent spate of media campaigns
aimed at the boomers is any indication.
Among the early media entrants are Hartford Financial (Prepare
to Live), Lincoln Financial (Hello Future),
John Hancock (The Future is Yours), ING (Your
Future. Made Easier), Pacific Life (Destination
Independence), AXA Equitable (the 800-pound gorilla campaign), Prudential
Financial (the rock-solid retirement campaign), Genworth Financial (the six
centenarians campaign), Fidelity Investments (Smart Move),
and Ameriprise Financial (Dreams Don’t Retire).
Ameriprise Financial, which unleashed its most recent
boomer branding campaign in September 2006, is a leading financial planning and
services company with more than 12,300 financial advisors and registered
representatives that provides solutions for clients’ asset accumulation,
income management and insurance protection needs. The company’s financial
advisors deliver tailored solutions to clients through a comprehensive and
personalized financial planning approach built on a long-term relationship with
a knowledgeable advisor. The company specializes in meeting the
retirement-related financial needs of the mass affluent. Financial advisory
services and investments are available through Ameriprise Financial Services,
Inc.
The new campaign tells boomers their Dreams
Don’t Retire and features actor Dennis Hopper, a boomer icon, and a
1960s-style red chair—a chair Kim Sharan, the company’s EVP and chief
marketing and communications officer, calls the “anti-rocking chair”.
The broadcast ads feature people pursuing their
retirement dreams, from building a boat to designing an eco-friendly house. In
them, Hopper adopts a conversational style. In one ad, he says, “You still
have things to do, right? You have dreams. And there is no age limit on
dreams.” In another, he reminds boomers, “The thing about dreams is they
don’t retire.”
The integrated campaign also features print, radio and
online ads. The print ads portray “real” people in a way that captures their
retirement dream—photography, hiking and yoga, to name a few—posing with the
red chair.
The Dreams Don’t Retire
campaign is an evolution of the What’s Next
campaign that Ameriprise Financial launched in September 2005 as an independent,
publicly-owned company following its spin-off from American Express Company, the
sixth largest spin off in corporate history. The first phase of the campaign not
only launched a new brand, but also helped transform financial services
advertising with a focus on the positive rather than a message
of fear. As a result of this influential campaign, Ameriprise Financial achieved
over 40 percent brand awareness in just eight months.
Now the company wants to tell boomers how it’s
redefining financial planning, according to Jim Cracchiolo, chairman and CEO. In
fact, the campaign introduces a financial planning process Ameriprise Financial
calls Dream > Plan > TrackSM. Integral to that process is the
company’s popular Dream BookSM guide, which was developed in response
to findings from the New Retirement MindscapeSM study that Harris
Interactive and Ken Dychtwald, a leading authority on baby boomers, conducted
for Ameriprise in August 2005. Results show that people want to engage with
their financial advisor on a deeper, more emotional level. A key finding in the
study was that people want a financial advisor who understands them. This was
rated just as important as return on investment. According to Sharan, the Dream
Book has been wildly successful.
John Hancock, the U.S. subsidiary of Manulife Financial,
a leading Canada-based financial services group serving millions of customers in
19 countries and territories worldwide, also launched an impressive marketing
campaign in September 2006. Manulife offers clients a diverse range of financial
protection products and wealth management services through its extensive network
of employees, agents and distribution partners. John Hancock offers a broad
range of financial products and services, including whole life, term life,
variable life, and universal life insurance, as well as college savings
products, fixed and variable annuities, long term care insurance, mutual funds
and various forms of business insurance.
The John Hancock campaign—The
Future is Yours—showcases the evolution of the John Hancock brand after
Manulife Financial acquired it in April 2004 and launches the company’s first
new brand platform in a decade.
Shortly after the acquisition, John Hancock undertook a
comprehensive internal review of the brand and conducted extensive external
research among consumers and financial intermediaries. “Our research showed
that the John Hancock brand remains one of the best known, most respected and
trusted in the industry,” says Donna Driscoll, senior vice president, John
Hancock Brand Management and Corporate Communications. “It also proved to us
that we have the right offerings at the right time to address the emerging needs
of the ‘baby boomer plus’ (40-to-70 year old) population, who are seeking
solutions for managing their assets that appeal to their steadfast optimism. As
such, we are taking a new approach to spotlight the brand’s evolution that
reflects both the strength of our organization and its relevance to the world
around us.”
The campaign places greater emphasis on John Hancock’s
extensive line of investment products and services, including 401(k) plans,
variable annuities and mutual funds—products geared toward helping the
boomers, in particular, manage accumulated assets.
John Hancock kicked off the new approach with an ad
campaign that positions the company as a trusted legacy in the insurance world
that offers a wide range of top performing, innovative investment products,
empowers baby boomers to fulfill their life promises, and assures them The
Future is Yours.
The emotional ads articulate the human condition in a
highly individualized style and feature vignettes of people telling their
personal stories. Like Ameriprise, John Hancock made a deliberate choice to eschew a fear-based
message and deliver a positive, upbeat one. “John Hancock knows people make
promises to themselves and their loved ones-particularly about the future,”
says Driscoll. “The hopefulness and optimism inherent in these promises is
powerful. That is what today’s John Hancock stands for: understanding life
promises and empowering people to fulfill them.”
John Hancock also is embedding that message throughout
the organization, including human resources, community relations and recruiting.
“The Future is Yours reflects the brand
attributes of our organization today,” says Driscoll. “Our employees not
only understand what an optimistic, innovative and contemporary company we are,
but also live it in their daily jobs. We believe those attributes work for our
consumers as well.”
Hartford
Financial Services unveiled its powerful marketing campaign—Prepare
to Live—last month. A Fortune 100 company, The Hartford is one of the
nation’s largest financial services and insurance companies and a leading
provider of investment products, life insurance and group benefits; automobile
and homeowners products; and business property and casualty insurance. Its
international operations are located in
Japan
,
Brazil
and the
United Kingdom
.
Tied to the company’s NCAA® corporate
partnership, the campaign features new, 15-second television commercials and
print and Internet advertising that focus on confident planning, control and
choice in retirement planning.
“Times have changed,” says Ann Glover, chief
marketing officer for The Hartford. “Workers know they cannot depend on Social
Security benefits, defined pension programs or retiree health benefits to fund
their retirement, and are unsure about their ability to pay for rising health
care costs in retirement. Through this campaign, we are encouraging baby boomers
to understand their personal financial picture and goals and take control of
their financial future. By seeking education and facts about their own
situation, they can prepare with confidence for what should be one of the most
rewarding times in their lives—their retirement.”
The new T.V. spots feature the iconic red hart stag, but
in a new and modern computer-generated imaging format. In the spots, a
silhouetted Stag serves as a trusted guide, finding his way through various
terrain and obstacles before returning to his traditional, ceremonious pose on
top of the mountain. Set to upbeat, energetic music, the voice-over in one spot
reminds customers, “You only retire once, provided you do it right.” In
another spot, the voice-over says, “One day you’ll greet retirement. How
open will your arms be?” The stag serves as a symbol of stability, strength
and wisdom—features the boomers look for in a retirement partner.
The spots run during NCAA® basketball and
football games and PGA Tour events. And, during last month’s NCAA®
March Madness® season, The Hartford re-ran its highly recognized
“Trophy” and “Trading Floor” spots. In “Trophy”, the stag makes his
way though a trophy-lined corridor onto the basketball court where the legendary
John Wooden coached teams to an unmatched record of 10 NCAA Division I men’s
basketball championships. Throughout the spot, Coach Wooden is overheard
offering stirring comments on winning with integrity and the importance of
trust.
Roll Over
What
opportunities exist for these and other financial services companies? In a word,
lots.
One of the most talked about opportunities is rollover
capture coupled with holistic advisory services. Insurers are competing against
banks and brokerages for the billions of qualified plan rollover dollars that
new retirees release every year. While life insurers are capturing some of those
rollover dollars in annuity products, none is a top 10 rollover player,
according to a 2006 LIMRA study. Three of the top players—Ameriprise, Fidelity
and Merrill Lynch—own insurance companies, but funnel most rollovers into
equities and mutual funds, not insurance products. The remaining seven are
mutual fund companies.
Asset rollover is not a new concept, as everyone who has
changed jobs and placed a vested 401(k) balance into an individual IRA knows.
These plan rollovers, or 1035 exchanges, place money from one qualified product
in another qualified product—that is, a product that qualifies for tax-free
accumulations. What is new is rolling over qualified retirement savings to a
single company that has implemented a powerful array of products and advisory
services specifically geared toward helping you create an income stream for
retirement—a feat you, until recently, would have had to accomplish on your
own working with an insurance agent, a broker, an accountant and a banker.
Boston fund giant Fidelity Investments woke up the
competition in June 2004 by rolling out its Fidelity Retirement Advantage
platform, a suite of planning and money management tools, accounts and
investment services aimed at helping retirees make their savings last through
their golden years and more efficiently spend their savings from various
retirement vehicles. Since then, the company has helped some 460,000 investors,
whose median age is 55, create retirement plans.
Though many banks offer a similar array of products and
services, none has yet to assemble them in a seamless package like Fidelity’s,
though analysts say one bank, Wachovia Corporation, is quickly gaining ground.
Fidelity evaluates a client’s risk—everything from living longer than
expected to general inflation and rising health care costs—and develops an
investment plan and draw-down strategy. It includes features like direct deposit
of Social Security checks, systematic withdrawals, and monitoring capabilities
to help clients stay on track.
In October 2006, Fidelity introduced Fidelity Life Income
Solutions, an open architecture annuity platform to capture the 401(k) money of
customers when they retire. The platform lets people who are leaving a 401(k)
plan buy fixed or variable annuities in order to establish an income stream for
retirement. Fidelity offers both proprietary and non-proprietary annuities,
among them, Principal Financial and John Hancock annuity products. Though
Fidelity has long offered annuities, coupling them with 401(k) plans is new.
Wachovia also has begun to take a holistic approach to
retirement services for consumers and businesses. Last month, the bank unveiled
new services that include eMagazine, an innovative, interactive magazine that
gives clients information and tips about preparing for and living in retirement;
programs and guidance for clients based on their age; and new, enhanced, free
retirement consultations at Wachovia financial centers nationwide.
The new programs follow a stellar 2006, when Wachovia saw
total IRA assets increase more than 15 percent to US$ 154 billion, making
Wachovia one of the nation’s top retirement providers. In addition, gross IRA
asset flows to Wachovia increased 19 percent to US$ 14.3 billion; annuity
premium sales jumped 16 percent to US$ 6.7 billion; and institutional
retirement plan assets—401(k) and pension plans—increased 60 percent to US$
110 billion, while the number of participants in those plans increased 56
percent to 2.1 million, fueled by strong organic growth and Wachovia’s June
2006 purchase of the 401(k) recordkeeping business of Ameriprise Financial.
The enhancements are part of Wachovia’s overall focus
on retirement planning that began about three years ago to meet the needs of
clients from all age groups, especially the baby boomers who have just entered
or are approaching their retirement years.
As part of the new offerings, Wachovia is unleashing its
new retirement branding—Get There. Your Way. Lifetime Retirement Planning with
Wachovia—in marketing, advertising and sales materials.
T. Rowe Price Group, a global investment management
company with some US$ 294 billion in assets under management, launched Advisory
Planning Services, an enhanced suite of retirement planning services, in October
2006. The company offers a broad array of mutual funds, sub-advisory services,
and separate account management for individual and institutional investors,
retirement plans, and financial intermediaries. It also offers a variety of
sophisticated investment planning and guidance tools.
T. Rowe Price created Advisory Planning Services to help
consumers who are saving for retirement, approaching retirement, or already
retired. As part of the services, the firm provides a complete portfolio
evaluation and a detailed personalized recommendation for effectively investing
for retirement and drawing down those assets during retirement. The
recommendation is based on discussions that the investor has with a T. Rowe
Price advisory counselor and a detailed questionnaire that provides insights
into the client’s financial preferences—such as desired retirement date,
achieving a high monthly income, or leaving a legacy to heirs—and investment
experience, risk tolerance and current financial picture. The services are build
upon state-of-the-art financial modeling technology that leverages proprietary
software to assess how the recommended strategy might perform based on 1,000
hypothetical market scenarios.
Available for a one-time fee of US$ 250, Advisory
Planning Services include free ongoing reviews to help consumers stay on track
and are designed to meet three challenges:
Saving for retirement. Shows
the amount one needs to save and how to invest to meet one’s retirement income
goal.
Transitioning into
retirement.
Recomends a realistic investment and income withdrawal strategy for the year in
which one is planning to retire that will support a desired retirement lifestyle
and ensure that investment assets last throughout retirement.
Managing retirement
income.
Evaluates one’s retirement investment and income withdrawal strategy and
recommends the amount one should withdraw from investments to best sustain
purchasing power throughout retirement without running out of money.
When preparing a recommended strategy, T. Rowe Price
takes into account the investor’s financial assets, regardless of where they
are held. Once investors receive the recommendation, they review it with their
counselor and receive assistance with implementation, if needed. The advisory services are geared
toward investors with at least US$ 100,000 in investment assets. The one-time
fee is waived for investors with US$ 500,000 or more in assets with T. Rowe
Price and is reimbursed for those who transfer at least US$ 100,000 in assets to
the firm in connection with the service.
“The primary financial challenge for most investors,”
says Christine Fahlund, a senior financial planner at T. Rowe Price, “is
securing a comfortable retirement. Yet our experience tells us that many people
underestimate how much money they need to save and overestimate the amount of
income they will be able to withdraw when they retire. Our Advisory Planning
Services aim to put investors firmly in charge of their financial futures by
giving them the keys for making appropriate investment and retirement planning
decisions throughout their lives.”
Sound Advice
Although
insurers have yet to penetrate the top 10 list of asset rollover capture, only
the foolish will count them out. In fact, many are doing an outstanding job of
providing holistic, comprehensive information about retirement planning and are
rolling out increasingly innovative products for income stream creation.
One insurer that’s staking a claim in the emerging
retirement income market is the MassMutual Financial Group (MFG), which consists
of Massachusetts Mutual Life Ins. Co. and its affiliates. MFG has more than 13
million clients and some US$ 400 billion in assets under management. Founded in
1851, MassMutual is a mutually owned financial protection, accumulation and
income management company headquartered in
Springfield
,
Mass.
In May 2006, the company unveiled the Retirement
Management Account (RMA), an innovative advisory program and rollover IRA that
enables financial advisors to help their clients turn qualified retirement
savings into inflation-protection monthly payouts that last their lifetime. This
new, multi-faceted program is meant to emulate a personal lifetime pension.
The RMA combines mutual fund asset management with the
ability to incrementally buy into a fixed immediate annuity, all in one single
account with one statement and a monthly single paycheck. More specifically, the
RMA has four features:
* A
retirement income planning tool that provides continuous guidance on the
appropriate withdrawal amounts from the RMA year after year and provides
comparisons on various income management strategies. It also enables the
continuous refinement of income management decisions that helps the client
achieve the most appropriate balance between mutual fund model portfolios and
the immediate annuity.
* Mutual fund
model portfolios containing Oppenheimer funds that are available at net asset
value. These portfolios are developed by an independent third party and
rebalanced each quarter by MassMutual if they deviate from their original
allocation.
*A unique
immediate annuity known as the Flexible Benefits Annuity (FBA). The FBA provides
optional COLA protection and allows for the funding of multiple premiums into a
single contract through incremental purchases of annuity income benefits with
assets transferred from mutual fund model portfolios, a process called
retirement annuity laddering.
* An
administrative system that provides a single check for the client that includes
systematic withdrawals from mutual funds along with payouts from the
annuity—in short, one check, one statement, and one IRA account.
Created to help address retirees’ fears of outliving
their income and desire for flexibility and control, the RMA is currently
available only through investment advisor representatives of MML Investors
Services, a MassMutual affiliate.
“The RMA makes it easy for advisers to help clients
create a steady retirement income that helps reduce their worry and heightens
their confidence,” says Jerome (Jerry) Golden, corporate vice president of the
Income Management Strategies Division. “The RMA can give clients more security
than simply investing their savings and drawing on them year after year for
income. And it provides more flexibility than simply buying a lifetime annuity
in a lump sum, which can limit client options if unexpected needs or emergencies
arise.”
These are just a few of the financial services companies
that are likely to gain competitive advantage in the retirement income market.
Boomers have said time and time again they’d like to be able to turn to one
company for holistic income planning and a mix of proprietary and
non-proprietary products. In the 2006 ING Financial
Planning and Investing Study, almost half of the survey respondents said
retirement planning is harder than raising a child and the majority (73 percent)
said they would switch to a financial services company with a reputation for
making the financial planning process easier. What they value most in a
financial advisor is knowledge; the ability to provide information in
straightforward language they understand; responsiveness to their needs;
outstanding service; recommendations for products that clearly address their
needs; clarity about all product costs, penalties and restrictions; and an
understanding of their needs and financial goals.
Although just a handful of companies are offering a
holistic suite of products and services that target retirement income
management, dozens of key financial services players are offering highly
sophisticated financial planning tools for consumers, salespeople and retirement
plan sponsors.
A good example is The Principal Financial Group®.
A leading global financial company, The Principal offers businesses, individuals
and institutional clients a wide range of financial products and services. These
include retirement solutions, life and health insurance, wellness programs, and
investment and banking products, which The Principal offers through a diverse
family of financial services companies and a national network of financial
professionals.
Individuals looking for retirement solutions can find a
wealth of information and tools on the company’s outstanding Web site, which
offers consumers a retirement planning calculator and educational material about
employer retirement plans, IRAs, mutual funds and
asset allocation programs. If they are employed by a company that offers a
retirement plan from The Principal, they have access to The Principal Retirement
Service Center, a special section of the Web site. The site also offers The
Retirement Income Planning Guide, a document to help consumers plan what
their expenses might be in retirement and how to plan according, as well as
detailed information about the Principal Income IRASM, a complete
program that creates a personalized retirement income plan, and various annuity
products.
Personal
Pension
Low
personal savings rates, disappearing pension promises, and underfunded federal
programs mean that creating a guaranteed income in retirement has become more
important than ever and product developers are stepping up to fill in the gaps.
The most popular solution is the annuity. With a basic
immediate annuity, you give an insurance company a lump sum in exchange for a
guaranteed stream of income for life. One downside of this approach is that
payouts can be far higher than the recommended draw down of no more than four
percent of retirement savings each year. That’s because you’re receiving
both principal and interest each month. And, until recently, the purchase of an
annuity was irreversible. If you died the day after your purchase, your money
was gone forever. Many of the new products provide extra flexibility, such as
early withdrawals and payments to heirs if you die sooner rather than later,
although they typically reduce the monthly payout.
One annuity innovation is medical underwriting. Annuity
companies generally determine payouts based only on age and sex. But
several—American International Group, Genworth Financial, Lincoln Benefit Life
and Vanguard Group—now offer products that increase payouts if you have
certain conditions, such as heart disease, most cancers or diabetes.
Another annuity innovation is longevity insurance.
Running out of money is rarely a big concern in the early years of retirement.
To protect against living too long, a few companies are offering annuities that
act more like insurance. You set aside a small amount of money when you retire,
or even earlier, and you get your first checks when you reach a designated age.
For example, if you make a one-time $25,000 investment in Metropolitan Life’s
basic Retirement Income Insurance fixed-rate annuity at age 60 and are still
alive at age 85, you’ll receive $24,300 a year for the rest of your life. If
you invest at age 55, you’ll receive $38,000 a year starting at age 85.
If you die before age 85, you don’t get anything, but you can add a
feature that pays a death benefit to your heirs if you die before the designated
payout date. The death benefit would equal the amount you paid in, plus three
percent a year since the date of your investment.
One of the most exciting new annuity products lets you
build your own personal pension. Only a handful of insurers offer the program,
which is financed while an individual is still working and saving for
retirement. In addition to investing in a 401(k), the employee can divert a
portion of his take-home pay to buy a guaranteed monthly income after he
retires.
Merrill Lynch was the front runner, launching the
Personal Pension Builder, an annuity for 401(k)s, in partnership with MetLife, in 2004. The
Personal Pension Builder allows a 401(k) plan participant to put part of his
retirement savings in a “personal pension” annuity by making monthly
contributions or depositing lump sums at various times. Each payment buys a
fixed amount of future income. Exactly how much depends on prices and interest
rates the day of the purchase. For example, at age 40 he might decide to
contribute $100 a month the first year and raise his payments by three percent
every year thereafter. The $100 he spends today will buy $428 a month for life,
starting at age 65; if he puts off taking the income until age 75, he’d get
$906 a month, based on the purchase price today, according to financial guru
Jane Bryant Quinn.
Genworth Financial was next, launching a product called
ClearCourse in 2005, followed by The Hartford, which unveiled The Hartford
Lifetime Income annuity in early 2006.
In December 2006, Prudential Financial introduced
Prudential IncomeFlexSM, a patent-pending defined contribution plan
feature that combines the security of lifetime income with the opportunity to
capture market upswings and the flexibility to control fund assets.
With IncomeFlexSM, defined contribution plan
participants may transfer all or part of their defined contribution plan assets
to one of five investment funds that range from conservative to aggressive.
These funds are separate accounts under a group variable annuity contract. Each
fund has a “market value” that fluctuates with performance as the
participant builds an “income base” that provides the foundation for a
guaranteed lifetime paycheck. IncomeFlexsm offers exceptional
flexibility and control. Participants choose how much of their defined
contribution plan assets to allocate to their chosen fund and they can move out
of the option at any time without withdrawal fees. Participants also can
withdraw more or less than their guaranteed amount during retirement and can
pass along any remaining market value in their account to their beneficiaries.
Who’ll be next? Insiders say Lincoln Financial Group
and ING are thinking about placing annuities inside their 401(k)s as well.
Although only a handful of plan sponsors have purchased
these products, analysts are convinced that plan participants want an annuity
purchase option in their 401(k)s and that enthusiasm for the option will only
grow.
Annuity living benefits also are hot. Why? Many retirees
decide against annuities because they worry that they’ll die soon after buying
or that they’ll want their money in an emergency.
Variable annuities today come with a variety of riders,
all of which are designed to address specific investment objectives and risk
profiles, but especially principal risk and longevity risk. Most of those
features come in the form of guarantees, chief among them the guaranteed death
benefit and the guaranteed living benefit.
Variable annuities with a guaranteed death benefit are
suitable for individuals who would like to be heavily invested in the market,
yet would like to have guarantees about the amount of money that their heirs
will receive even if the market declines, and who want at least some access to
the cash value in the meantime. In other words, they do not plan to or need to
annuitize their variable annuity. Often, the basic death benefit is equal to the
greater of (1) the contract value and (2) purchase payments less withdrawals
(also called a return of premiums guarantee) and is made to the beneficiary upon the
death of the owner and/or annuitant. Nearly all contracts sold these days have
additional death benefit features, including guaranteed accruals on premiums
and/or so-called “high water marks” that pay the highest value on any
previous contract anniversary date.
Living
Benefits
An
emerging variable annuity twist is guaranteed living benefits (GLBs), which are
designed for investors who desire current protection of principal, income, or
the ability to take withdrawals, while they are still alive. In some cases,
obtaining the protection features may require them to annuitize their
investment; in other cases, principal may be recovered through guaranteed
withdrawals over a specified period and annuitization is not required. Other
forms of living benefits guarantee a floor of principal that will be restored if
the annuity has experienced losses over a set time period. With a guaranteed
living benefit, the owner or annuitant is purchasing protection against
investment risk or the risk of not being able to generate an adequate amount of
income, and the variable annuity contract will either guarantee the level of
account values that may be accessed through current withdrawals or the amount of
annuitized payments that can be received in the future.
The most popular forms of guaranteed living benefits
features are guaranteed minimum income benefit (GMIB) riders, guaranteed minimum
accumulation (or account) benefit (GMAB) riders, and guaranteed minimum
withdrawal benefit (GMWB), guaranteed lifetime withdrawal benefit (GLWB) riders.
Guaranteed living benefits continue to drive variable
annuity sales, according to Milliman’s second annual guaranteed living
benefits survey of leading variable annuity carriers, the results of which were
released in December 2006. Total sales of variable annuities that offered a GLB
during calendar year 2005 averaged 87 percent of total variable annuity sales;
this figure increased to 89 percent during the first half of 2006, demonstrating
the continued popularity of such benefits.
A good example of living benefits innovation is New York
Life’s Lifetime Income Annuity, to which the insurer has added more liquidity.
If you need quick cash, you can receive five payments all at once, although you
won’t receive payments for the next five months. Or you can take a one-time
withdrawal from the annuity even after you’ve started to receive payouts (you
can only exercise this option in certain years or in the event of specific
disasters). For example, you could withdraw 30 percent of the total value of the
remaining payments that are expected to be paid, based on your life expectancy
when you purchased the policy. You would still get payments for the rest of your
life, but they would be reduced by 30 percent from what you would have received
otherwise. These are just a few of the withdrawal features the annuity offers to
help customers manage unforeseen circumstances.
Another innovator is Sun Life Financial, whose
U.S.
division launched Income ON Demand last month. Sun Life Financial is a leading
international financial services organization providing a diverse range of
protection and wealth accumulation products and services to individuals and
corporate customers. Chartered in 1865, Sun Life Financial and its
partners have operations in key markets worldwide, including
Canada
, the
U.S.
, the
U.K.
,
Ireland
, Hong Kong, the
Philippines
,
Japan
,
Indonesia
,
India
,
China
and
Bermuda
. The Sun Life Financial group of companies has total assets under management
of US$ 375 billion.
Income ON Demand is available for an additional cost with
most Sun Life Financial Masters® variable annuities, this
patent-pending option allows buyers to defer part or all of the annual
withdrawals permitted under the benefit and to “store” those withdrawals in
the contract for future use. Sun Life expects the boomers will want more control
over the timing of withdrawals than other generations of retirees and developed
the product to fill a gap in the market place. The product lets the retiree:
*Secure
lifetime income for themselves (as well as their spouses if they choose). This
income is equal to five percent of their income benefit base. The income benefit
base also can increase automatically, depending on the market performance of the
underlying investment options.
*Store
deferred withdrawals in a stored income balance. Any amounts in the stored
income balance can be withdrawn in a future year in addition to the annual
amount available in that year. Alternatively, the contract owner has a one-time
option within the first ten contract years to use part or all of the stored
income balance to increase the income benefit base, which results in the
availability of higher annual withdrawal amounts.
*Start,
stop and store income payments to meet changing needs through retirement.
*Restore
the account value to the sum of the purchase payments made in the first contract
year, if no withdrawals have been taken within the first 10 years and a down
market has driven the account value on the benefit maturity date below the total
of the first-year purchase payments.
“With guaranteed income from other annuities,” says
Mary Fay, SVP and general manager of Sun Life Financial’s Annuities Division,
“if you don’t use it, you lose it. But Income ON Demand lets each client
start, stop and store their guaranteed income to fund their lifestyle as it
evolves throughout retirement. This puts the client—not the contract—in
control of the income stream.
Another recent product innovation is the DB(k) plan,
which was jointly developed by Principal Financial Group® and the American
Society of Pension Professionals and Actuaries (ASPPA) and included in the
Pension Protection Act of 2006.
The DB(k) is a hybrid pension plan designed to address
the potential shortfalls in 401(k) plan savings and a decline in corporate
sponsorship of defined benefit (DB) retirement plans. Developers will not be
able to sell the plans until 2010 and they will be available only to employers
with fewer than 500 employees. The DB(k) combines a traditional DB pension plan
with a 401(k) savings plan. The plan provides a low employer-paid guaranteed
lifetime monthly retirement benefit that could be supplemented by voluntary tax
deferred contributions by employees. The minimum pension benefit, payable to
employees who work three or more years for the employer, will be equal to the
greater of one percent of average pay during the last three years of work
multiplied by the number of years worked under the plan, up to 20 years, or 20
percent of final average pay. The 401(k) component of the plan requires the
employer to match at least 50 percent of an employee’s contributions up to
four percent of the employee’s salary.
Roth products—that is, Roth IRA, Roth 401(k) and Roth
403(b) plans—are another recent development.
The Roth 401(k) was created as part of the 2001 tax law
and put into effect on January 1, 2006 as a way of encouraging more Americans to
actively save for retirement. Like a Roth IRA, the Roth 401(k) allows employees
to make post-tax contributions and tax-free withdrawals, if certain conditions
are met. However, the Roth 401(k) allows higher contribution limits than a Roth
IRA and there are no income limits to contribute. An employee can choose to
contribute to either a Roth or traditional 401(k), or choose to split
contributions between the two accounts.
In May 2006, President Bush signed into law the Tax
Increase Prevention and Reconciliation Act. The Act attracted headlines because
it extended the 15 percent maximum tax rate on long-term capital gains and
qualified dividend income. But the legislation does away with the income
limitations for individuals seeking to convert a traditional IRA into a Roth IRA
starting in 2010. Although that’s three years away, the legislation actually
gives workers and their spouses a back-door entry into investing in Roth IRAs,
no matter how much they earn.
Insurance companies are on the leading edge of the Roth
trend. Last year, for example, American United Life, Hartford Financial
Services, ING (
Americas
), John Hancock, MassMutual, Nationwide Financial Services, Principal Financial,
and Transamerica Financial all launched Roth products, many with exceptional
educational materials and online Roth calculators, for both plan sponsors and
employees.
Although employers are just starting to add Roth products
to their benefits lineup, most have added asset allocation mutual funds to their
401(k) plan investment options.
When investors choose their own mutual funds, it’s
often hit-or-miss. Employers worry about this, because they don’t want to be
blamed for losses if their workers retire poor. To help employees invest
prudently and diversity sensibly, they are offering asset allocation funds,
which spread the employee’s money over several types of investments, including
U.S. and international stocks, bonds and real estate securities. Lifestyle funds
let the employee choose one of three professionally managed
portfolios—conservative, moderate or aggressive. For target retirement funds,
which also are known as life cycle funds, the employee simply picks a retirement
date; the closer he gets to that date, the more conservative the fund
investments become.
Money is pouring into these funds. In fact, assets of
life cycle funds surged nearly 70 percent in 2005, to US$ 70 billion, according
to the Investment Company Institute. In the first half of 2006, life cycle funds
accounted for two in 10 of the best-selling categories of funds, according to
Financial Research. And, as of June 2006, nearly half of employers offer these
funds in their 401(k) plans, according to a national survey conducted by Wells
Fargo.
Look for this trend to continue, especially in 401(k)
plan choices. That’s because the Pension Protection Act of 2006 encourages companies to
automatically enroll workers in retirement plans. And for those workers who
don’t pick an investment option, target date funds are likely to serve as the
default investment, rather than the low-return money market or stable-value
choices of the past.
This is good news for insurance companies, because they
sell both 401(k) plans and mutual funds. It’s good for the competition, as
well, especially for AllianceBernstein, American Century, Fidelity, Putnam,
Schwab, T. Rowe Price, and Vanguard, which now offer these funds.
As you can see, financial services players are
re-branding for the baby boomers, shifting operational mindsets from asset
accumulation to income generation, developing new products, educating
consumers—and more—in a bid for boomer rollover dollars. If you build it,
will the boomers come? That's the multi-billion dollar question.
Market
Challenges
Intensifying
Competition
Everyone—insurers,
banks and brokerages—wants a piece of the retirement income pie.
President
Bush
The
President is a staunch advocate of replacing every sort of tax-advantaged
savings vehicle, including insurance products, with three simpler plans, each of
which would grow tax free. Thus far, Congress has said no.
Product
Fees
The
fees and expenses levied on checking and savings accounts, credit card balances,
401(k)s and brokerage accounts are cutting deeply into middle-income budgets,
making it more and more difficult to build a retirement nest egg. Insider market
timing abuses, lower fee tiers for the wealthy, and opaque product fee
structures are causing consumer cynicism and distrust of the financial services
sector. The current hot buttons are the erosion of employee investment returns
due to 401(k) fee structures, variable annuity loads, and life cycle mutual fund
fees. Is it any wonder that ING Direct and HSBC Direct, with their
no-minimum-balance, no fees savings accounts, which offer an interest rate of
five percent+, have taken the market by storm?
Product
Complexity / Inadequacy
Despite
increasing annuity sales, it actually is hard to sell an annuity to a boomer,
who finds the product expensive and difficult to understand, especially as
enhancements multiply. In addition, annuity suitability litigation is on the
rise. And financial planners say no one—insurers, banks or brokers—offers
products that truly meet boomer needs.
Investment
Advice
The
boomers are desperate for unbiased, qualified plan investment advice that
encompasses their entire financial picture—not just benefits newsletters and
asset allocation pie charts. The Pension Protection Act of 2006 makes it much
easier for employers to supply it, but will they? Last month, IBM announced it
will provide free, comprehensive financial advice to its 127,000
U.S.
employees; while financial planning is a common perk for executives, this is
believed to be the first time a major
U.S.
company is providing this level of individualized advice to all employees.
Unraveling
Safety Nets
The
boomers will live longer than any generation in American history. As they age,
however, they will face the possibility of forced early retirement, tepid home
values, defined benefit retirement plan terminations, college loan balances for
their children, disappearing retiree health benefit plans, and possible
shortfalls in government programs such as Social Security. What about the $41
trillion hand-over of inheritance everyone was talking about 10 years ago? It
has yet to materialize for most boomers, because their parents are living into
their 90s—and beyond—and incurring high health and nursing care expenses.
‘Crisis’
Rhetoric
Despite
the much-ballyhooed negative savings rates of Americans and genuine concerns
about the sustainability of corporate and government retirement programs, some
analysts believe the retirement crisis has been dreamed up by Madison Avenue on
behalf of the financial services industry—and they’re beginning to speak out
in the mainstream media.
Market
Opportunities
Rollover
Capture
New
retirees release billions of qualified plan dollars every year. While life
insurers are capturing some of those dollars in annuity products, none is a top
10 rollover player—yet.
Holistic
Advice
A
handful of companies have rocked the industry by unleashing a powerful array of
products linked to advisory services specifically geared toward creating a
retirement income stream. Will your company be next?
Financial
Education
All
of the top insurers, banks and brokers have designed effective financial
education programs for consumers, salespeople, plan sponsors—and more. These
programs build brand recognition and instill confidence in prospective
customers. Build it and they will come.
Product
Development
Among
the most popular new products are annuities with living benefits and annuities
embedded in 401(k) plans that enable employees to build their own personal
pensions while they are still working and saving for retirement. Others include
DB(k) hybrid pension plans; Roth IRAs, 401(k)s and 403(b)s; and target-date
mutual funds. Financial services companies also are cross selling long-term care
and disability insurance to protect retirement income streams from decimation.
Other
Thoughts
Resource
asked Michael W. Risley, president of the life and annuity division of CSC’s
Financial Services Group, for his thoughts on the Boomer retirement market.
Here’s what he had to say.
Q:
What opportunities does the looming retirement of the huge Baby Boom
generation offer to the life insurance industry?
A:
Over the next 25 years, there will be an unprecedented transfer of wealth
from older generations to the Baby Boom generation. They will use this wealth
both to help prepare for their own retirement as well as provide a legacy for
their children. The life insurance industry is uniquely positioned to support
this process through a combination of flexible asset accumulation products such
as annuities and variable life insurance as well as guaranteed income
distribution products such as annuity payouts.
Q:
How can the insurance industry differentiate itself from other
competitors—banks, brokers and mutual find companies, for instance—in
serving the Baby Boomer market?
A:
There are two main ways in which the insurance industry can demonstrate a
valuable difference from other types of financial
instruments: by providing a guarantee that a specific stream of income will be
available to contract owners for their lifetime and by providing the ability to
avoid federal income tax on the payment of life insurance policy death benefits.
No other financial instruments can match these capabilities.
Q: What technological
innovations could help the insurance industry better serve the Boomer market?
A: In the past, insurance
contracts have been inflexible since they often required a person to have a
separate contract for asset accumulation and one for asset distribution.
Today’s technology enables insurance contracts to provide liquidity to the
policyowners by allowing them to continue making contributions while
simultaneously receiving an income distribution. Baby Boomers need access to
their cash to cover daily living expenses, but, at the same time, they want to
continue to save for retirement.
Q: What new products and
services could be of interest to the Boomer retirement market?
A:
There is growing interest in hybrid insurance products that provide
liquidity while establishing a solid base for retirement assets. With
more Baby Boomers reaching retirement age every year, the growth in these types
of products will be tremendous.
LOMA
Can Help
If
you’re interested in tapping the potential of the Boomer market, LOMA can
help.
Your first stop should be the annual Retirement Industry
Conference, which we host with LIMRA International and the Society of Actuaries.
Designed for professionals who work in annuities, retirement plans and the
growing field of retirement income, the conference brings together a variety of
perspectives and offers many opportunities for networking. Featuring a mix of
keynote and general sessions, as well as three dozen breakout sessions, the
Retirement Industry Conference will challenge you and help you find solutions in
this growing, exciting business.
You
also should take a close look at our:
Fellow,
Financial Services Institute (FFSI) Program
Associate,
Annuity Products and Administration (AAPA) Program
Associate,
Customer Service (ACS) Program with a focused annuity track
Intro to Annuities Online
Information
Center
Briefs on retirement topics ranging from financial gerontology to inherited IRAs
Resource, which regularly publishes research on the retirement topic
Various
operations committees comprised of LOMA member company professionals
For
more information, visit www.loma.org, e-mail askloma@loma.org, or telephone
1-800-ASK-LOMA (1-800-275-5662).
|
