RETIREMENT INCOME: Industry grapples with developing retirement income products

CHICAGO — As the financial services industry scrambles to create products to allow retirees to spend their nest eggs without going broke, advisers who adopt a “process oriented” approach to retirement income planning will likely dominate, according to a soon-to-be-released white paper.
“The vast majority of advisers have limited knowledge in how to comprehensively plan, implement and monitor retirement income,” concluded the 24-page paper, released in advance exclusively to InvestmentNews by FundQuest Inc. in Boston.
“This is because institutions and their advisers have been focused on investors’ asset accumulation phase and have been using platforms and products designed for accumulation. Without access to a well-defined retirement income process and an integrated platform specifically designed for income distribution, most advisers are left to take ad hoc approaches with predictably mixed results,” according to the paper.
The paper, “A Process-Centered Approach to Retirement Income,” suggested that investors will become “increasingly wary of product-centric ‘one investment does it all’ approaches.”
It states: “Similarly, investors will become increasingly uncomfortable with planning approaches that are either too complicated, too inflexible or are only loosely integrated with implementation and ongoing monitoring.”
Rush to boomers
The release of the white paper comes as many companies — particularly insurance and mutual fund companies — are rushing to develop products aimed at helping baby boomers draw down their retirement assets.
Baby boomers’ overall assets are expected to grow to $30 trillion by 2010, according to FundQuest.
But developing products aimed specifically at the retirement income market is proving to be a formidable task.
A big part of the problem is that developing such products requires changing the mind-set of an entire industry, said Christopher Warren, managing director and head of structured products with New York-based DWS Scudder Distributors Inc.
“Mutual funds weren’t oriented for people who want to draw down assets in a systematic way,” he said. “Most investment vehicles were really orientated to do one of two things — make it easy for companies to invest, and help investors in the long term.”
The highly regulated nature of the investment industry is also making it difficult for product manufacturers to develop new retirement income products, Mr. Warren said.
Exacerbating matters is the fact that the retirement income market still is in the early stages of its own development, said Pamela S. Schutz, executive vice president of retirement and protection for Genworth Financial Inc. in Richmond, Va.
“It’s because it’s a new market,” she said. “The technology and education isn’t all stitched together yet.”
That’s not to say companies are not trying to develop products aimed at the burgeoning retirement income market.
In recent years, for example, many insurance providers have launched annuities, long-term-care and life insurance products with retirees in mind.
Many mutual fund companies, meanwhile, have unveiled funds that focus on asset allocation, reduced volatility and increased income diversification.
Lifestyle funds, for example, are typically used as accumulation vehicles, but officials at Baltimore-based Legg Mason Inc. think that they also play an important role as a retirement income tool.
Rather than putting all their funds in conservative bonds or money market funds, retirees should invest in more-balanced portfolios, ones that include U.S., as well as international stocks, said Wayne Lin, an investment strategy analyst with Legg Mason.
“In retirement, you can be overly conservative in investing, and there’s a risk to that,” Mr. Lin said. “If you invest in [certificates of deposit] and money markets, you’ll never lose money, but you’re also exposed to the risk of inflation and the risk of running out of money.”
The industry will come up with more retirement income products, said Mr. Lin, but not before seeing more demand from baby boomers.
“I think trying to find one product is a tough nut to crack,” said Drew Denning, vice president of The Principal Financial Group Inc. in Des Moines, Iowa. “Our view is what’s important is how you package many of the existing products today.”
Product versus planning
That may be the case, but many financial advisers aren’t necessarily looking for new products or better packaging of existing ones, said Robert Del Col, chairman of FundQuest. “I remember a lot of advisers saying, ‘We’ve got enough products, and don’t need any more bells and whistles.’”
Others agree.
“The real issue and debate is whether a product solution is needed or a planning solution is needed,” said Stephen Mitchell, director of education and planning for New York-based Merrill Lynch & Co. Inc.’s retirement group. “We believe it’s a planning solution.”
Any approach to the retirement income market needs to be simple enough that it can be explained to — and followed by — investors, said Edmond Walters, chief executive of eMoney Advisor Inc. in Conshohocken, Pa.
“You can over-engineer this stuff and confuse the client,” he added. “If you confuse the client, they won’t take any solution.”
The same applies to any technology used by advisers to facilitate retirement income management, said Neal Ringquist, president and chief operating officer of Advisor Software Inc. in Lafayette, Calif.
“You hear grousing from advisers, not because there aren’t enough tools … but if they don’t use the technology frequently, they get frustrated,” he said.