In Practice April 12, 2007

Process Required for Success in Retirement Income

Adopting a process-centric approach to retirement income management will provide better service to clients and will lead to faster asset growth for the adviser, along with higher productivity and greater client retention.
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Using a process approach, instead of a product or planning approach, will optimize sustainable retirement income programs for individuals, says the white paper, “A Process-Centered Approach to Retirement Income–Best Practices for Institutions and Advisors,” released this week by FundQuest, a provider of customized turnkey managed investment account solutions to financial institutions. The process approach suggested in the paper includes a complete cycle of analysis, planning, implementation, ongoing monitoring, and adjustment.

Currently, few financial services firms have invested in comprehensive retirement income platforms, the paper says. Advisers need a solution that allows them to answer the following questions for each client:

  • Will I have enough to retire?
  • Am I invested appropriately?
  • What is the best way to generate the income I need?
  • Will I have to work in retirement to support my lifestyle?
  • What are the trade-offs and key drivers?

The paper asserts that “good planning by itself or solutions driven by one-time single product sales are inherently insufficient to address the complexity of an individual client’s evolving retirement income needs.” Therefore, product-centric or planning-centric solutions are not a sustainable approach for advisers looking for a retirement-income management tool because they make it hard to reconsider ongoing risks such as longevity, health care costs, market risks, functional inflation, withdrawal rate and insufficient savings, impact of unplanned events, and bequest planning. Using a process-centered approach lets advisers cope with unexpected events and risks on a continuous basis. For example, ongoing monitoring processes help ensure that plan adjustments, often driven by major life changes and investment performance, are implemented on a timely basis, FundQuest says.

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According to Bob Del Col, Chairman of FundQuest, “Financial institutions recognize the significant value that advisers and their clients can derive from a process that tightly integrates planning, implementation, and ongoing monitoring capabilities. Institutions also recognize that this integrated approach has significant advantages versus standalone retirement planning tools.”

Most advisers use some type of formalized retirement income software program to work with clients, the paper says. However, it continues, many of these products are “home grown,” solutions made by the adviser using components of the accumulation-based programs available in the marketplace, and advisers believe that their productivity in the retirement income market would improve if they had better retirement-specific software, tools for educating consumers, and more training. Rounding out the top five things advisers said would help their productivity were better lead generation and models or calculators to use with clients.

“Advisers and financial institutions have told us that one-time-single-product sales, and set-it-and-forget-it solutions are inadequate. With a comprehensive process, supported by automation and appropriate products, advisors can efficiently create and maintain individualized retirement income programs,” said Lisa Burns, co-author and FundQuest Retirement Product Manager.

Therefore, FundQuest says that the best way to address the needs of Baby Boomers in retirement is to develop a process-centric solution with three steps: plan, implement, and monitor. The paper details the practical actionable steps advisers can employ to address each investor’s specific needs in retirement and along each step of the process. The benefits of using a process-centered approach include, according to FundQuest: the ability to retain clients before and during retirement, asset consolidation, increased productivity, and comprehensive documentation of client data, goals and assumptions.

The paper says that one of the reasons this model works so well is that the adviser and the investor work closely together during the planning and analysis phase. With that close interaction with the adviser, clients are more likely to both proceed with the resulting investment recommendation and to consolidate their assets at the guiding institution because they feel they have been involved in the process of creating a unique solution for their situation.

 

The white paper is available at: www.fundquest.com/press-resea.htm

Del Col recently presented excerpts from the paper at the Retirement Income Industry Association’s annual conference (See Tackling the Retirement Income Arena Requires New Processes)
Data & Research April 11, 2007

Workers Willing to Get, Not Necessarily Take, Advice

Even as defined contribution plans emerge as the preferred employer-sponsored pension plan, a survey by the Employee Benefit Research Institute (EBRI) and Matthew Greenwald&Associates suggests that workers may not follow investment advice when it’s offered.
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More than half of workers (54%) surveyed as part of the Retirement Confidence Survey (RCS) indicate they would be likely to take advantage of professional investment advice offered by companies that manage employer-sponsored retirement plans; however, two-thirds (66%) of these workers say they would probably implement only some of the recommendations they receive and 11% think they would implement none of them.
Nineteen percent of workers state they would be very likely to take advantage of investment advice if it were available at a modest cost; 35% said they would be somewhat likely to take advantage of the service; and approximately two in 10 each would be not too likely (21%) or not likely at all (22%) to use such services.
However, when they do use educational materials, 40% of people found the advice of a financial professional most helpful when compared with all other sources of education materials about retirement, followed by the advice of family, friends or coworkers (18%) and written materials from an employer (15%).
Defined Benefit Plan Access
Although Americans may be aware of the dwindling pension system, the majority has not correlated the news with a need for increased personal savings. Nearly half (45%) of U.S. workers are less confident that they can count on traditional pensions when they retire as a result of recent changes to the employer pension system, but only about one-third say they are saving more money on their own as a result, RCS says.
The survey showed that some workers are putting their confidence in employer benefits that are increasingly becoming unavailable, with 41% of workers saying they or their spouse now have a DB plan, but 62% of those respondents saying they expect to get income from that plan in the future.
Only 20% of workers are counting on getting DB pensions from a future employer, EBRI says, a reality that is becoming dimmer as employers continue to shift in droves to DC plans. In fact, the report shows that this has already begun to happen as some workers (17%) admit to already seeing a reduction in their benefits.
The unrealistic expectations are leading to small account balances; nearly half of all workers saving for retirement have savings that fall short of the $25,000 mark and 34% don’t have any money saved for retirement and 25% have no savings at all. It is not just young workers either, half of workers age 35 to 44 and a third of workers age 45 to 55 and older have balances under $25,000.
Retirement Savings Needs
The survey showed a lack of understanding in how much money will need to be saved for retirement: 30% of workers believed their retirement nest egg would need to be worth less than five times their current income, while 27% thought they needed to save between five and 10 times their income. However, according to EBRI estimates, this means the majority of people are grossly underestimating their savings. Men should have a savings equal to about 12 times their income just before retirement, EBRI estimates, and that number is 14 times for women, to accommodate their longer life expectancies.
Workers are taking the following measures to make sure they have enough for retirement, according to the survey says:
32% say they are saving more, either on their own (24%) or in an employer’s plan (8%).
12% say they are trying to stay healthy;
5% plan to work during retirement;
5% are making greater use of financial planning or investment information;
4% plan to postpone retirement;
4% plan on seeking advice from a financial professional; and
Almost four in 10 indicate they have done nothing in response to the reduction in benefits.
Overconfidence in Health Care Coverage
Even though many employers are eliminating health care coverage for future retirees, 41% of workers expect to have access to employer-provided health insurance when they retire.
The report found that 24% of workers and 35% of retirees report they have long-term care insurance (separate from health insurance, Medicare, and Medicaid) to help pay for care they might need in a nursing home, assisted living facility, or at home. Estimates of private long-term care insurance policy use show that 10% of Americans age 65 and older had private long-term care insurance in 2002, suggesting that many are counting on coverage they do not actually have, the report said.

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