In Practice February 20, 2007

More DC Participants Means More Questions

An anticipated 20% increase in defined contribution (DC) participants between 2007 and 2011 means a pool of 9.6 million people with potential questions regarding their plan, according to a new research report.
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A TowerGroup news release said the new participants, resulting from automatic enrollment, are likely to be less experienced with retirement plans and have questions on quarterly statements, investment performance, plan provisions and the use of self-service features.

Generally, because of auto-enrollment and auto-deferral increase, TowerGroup said, DC plans will go from $103 billion in assets in 2007 (79% participation rate and 5.4% average deferral) to $109 billion in 2011 without the auto plan features and $204 billion with the auto features (95% participation rate and 8.4% average deferral). The data assumes a 2007 average salary of $39,900 and 1.5% annual increases.

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“With so many baby boomers on their way to retirement, it is essential that the country focuses on how companies support their employees in saving for retirement,” said Peter Delano, senior analyst in the TowerGroup Investment Management practice and author of the research, in the news release. “The Pension Protection Act includes features that make it more appealing for companies to offer defined contribution retirement plans to their employees as opposed to defined benefit plans. Other critical changes such as automatic enrollment will drive significant growth in total U.S. defined contribution assets.”

Meanwhile, the news release said that defined benefit (DB) plans are forecast to cover an estimated 11% of U.S. workers by 2011 – down from 20% in 2004 and 62% in 1983, according to a new research report.

TowerGroup researchers said defined benefit plan sponsors are likely to choose one of three options in response to the Pension Protection Act (PPA):

  • increase contributions to underfunded plans,
  • invest more assets in alternative investments; or
  • freeze defined benefit plans.

The Needham, Massachusetts-based TowerGroup is a research and advisory services firm for the financial services industry.

Data from the study is here. More information is at www.towergroup.com

In Practice February 19, 2007

Tackling the Retirement Income Arena Requires New Processes

Financial services forget that people planning for retirement income need to balance the risk of living long with the possibility that they won’t, according to Robert Del Col, President of FundQuest.
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Speaking at the Managing Retirement Income conference in Boston last week, Del Col said that the best way to address the needs of Baby Boomers in retirement is for financial services firms to develop a process based solution in three steps: plan, implement, and monitor. A process should integrate tools, products and services, he said, because that creates a relationship.
Baby Boomers do not need to be educated on principal risk, but do need some help understanding inflation, withdrawal strategies and longevity risk, said William Lowe, the Head of Financial Solutions Group for ING Financial Advisors.
Product Differentiation
The current offerings of products can fit into four categories, Lowe said: asset allocation products, investment solutions, guaranteed solutions, or hybrid solutions.
Daniel Rosshirt, Senior Manager at Deloitte Consulting LLP, said managing retirement income offers a significant opportunity for financial services firms. Although the firms are aggressively preparing for and pursuing the Boomer opportunity, there isn’t much differentiation between products currently. This is an issue, Rosshirt said, because that intense competition leads only to one outcome: consolidation.
Rosshirt said he sees three areas which need to be addressed to achieve product differentiation. First, market segmentation; to succeed, Rosshirt said a distributor needs to understand what market is being targeted. The need is in the mass affluent market, Rosshirt said, a demographic which will be challenging to address, but has potential. When segmenting the marketplace to determine a target demographic, the market has traditionally been defined by assets. However, Rosshirt said, wealth is not a good predictor of buying behavior. Rather, comfort-level with the product is a better predictor of client needs.
Further, “trust is a key driver of success in this marketplace,” Rosshirt said. Therefore, in order to have successful products, the providers must provide more valuable information on retirement options and help Baby Boomers understand what they should choose. This is where a valuable financial adviser can come in, because those who currently serve the retirement income market tend to do so because clients come to them, they don’t go out looking to serve it, Rosshirt said. This can change by financial advisers becoming more comfortable with the products available and the needs those products serve.
Lastly, Rosshirt said, providers will have to learn how to deliver these types of solutions economically.
Lowe predicted that three trends which will continue to grow are life planning, or how a person envisions retirement, full service accounts, such as Fidelity’s Retirement Income Advantage, and guarantees in defined contribution plans, perhaps coming about as part of a marriage between managed accounts and guarantees.

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