As legions of boomers leave the workplace, distributors and insurers are grappling with the best way to manage these clients' income streams in retirement.
This conundrum was the focal point of a panel discussion at the Insured Retirement Institute's annual conference in Williamsburg, Va., on Tuesday. Indeed, the root of all distribution strategies lies in basic
financial planning that will also call for some products.
“When I think about retirement income, I think of it as a
financial planning problem,” said Stefan Hubrich, a panelist director of asset allocation research at
T. Rowe Price. “I try to not go to product right away, but I recognize, of course, that products are ultimately the most important part of the solution.”
(See also: Mary Beth Franklin: Do you speak Social Security?)
The key issue, however, is coming up with a product idea that will solve the most important retirement income challenges, while remaining simple enough for investors and advisers to comprehend.
Panelist Marc Pester, senior vice president of Prudential Retirement, pointed out a handful of benchmarking metrics applicable to income solutions: sequence of return risk or the risk of having negative returns early in retirement, conversion risk or the risk that a retiree doesn't know what his account value will yield in income until he gets to retirement, and longevity.
It's hard to address all of those priorities with any one product.
“If you have a nonguaranteed solution, it does a great job of giving flexibility and control over my account value at all times,” said Mr. Pester. “If I have a health status change, and I want access to my market value, I can do that.” But those nonguaranteed products don't necessarily address the longevity and sequence of return risks.
Though insurance products address longevity and sequence of return concerns, clients do give up access to liquidity with traditional fixed annuities. Meanwhile, guaranteed minimum withdrawal benefits are a viable income solution, but the income stream they provide isn't as high as it would be if the client were willing to give up flexibility and control.
Enter the distributors. Broker-dealers and wirehouses are important players in the product development process.
From that point of view, simple is better.
“Many people think that because we specialize in servicing high-net worth and ultra-high-net-worth clients, that the solution needs to be complicated and it doesn't,” said panelist Phil Pellegrino, executive director and head of annuities at
UBS Financial Services Inc.
“The worst place you want to be is to get really excited about a product, present it to a distributor and say, 'Here it is. You haven't seen it before. You're going to love it and drive this through your product committee. We'd like to get it out next month,'” said Mr. Pellegrino.
“That typically isn't the right route to go,” he added. “It's very important that we partner through the process as best we can.”
Indeed, dollars tend to gravitate toward the simpler products on firms' platforms. “If some of the more complex products make sense, we will put them on the platform and let the advisers vote with premium dollars,” said Bob Steinke, senior vice president and head of the managed and insured solutions group at Janney Montgomery Scott, who attended the conference.
“Traditionally, the way they vote is for less complicated products with simpler stories and fewer options,” Mr. Steinke said.
In execution, manufacturers need to remember the key goal of using a retirement income product: to create income for the client.
“At the end of the day, the client is concerned about living 20 or 30 years in retirement, and they want something that delivers them a guaranteed income plan,” Mr. Pellegrino said.
