Maze of Options

As each study is released showing a lack of retirement savings by Americans, the most recent from the Employee Benefits Research Institute (EBRI) that reported 42% of workers age 45 and older have total savings and investments of less than $25,000 (only 18% of workers in that age group cite assets of $250,000 or more), is it any wonder that only 16% of workers are very confident that they will have enough money for a comfortable retirement?

The problem of how to make whatever a worker has saved last through the retirement years has been of great interest to product providers, advisers, and, most recently, the federal government. However, despite a proliferation of retirement income products and the continuing efforts of financial services firms to capture the retirement income market, there does not yet seem to be a consensus on what the right product solution is.

In fact, according to recent data from Cogent Research, when affluent retirees and pre-retirees were asked which firm is the “best” among retirement income providers, no one firm was chosen by more than 10% of survey respondents, far fewer than the largest percentage of respondents, who said they “don’t know” (26%). In addition, asked to name the company they would be most likely to consider when purchasing a retirement income product, more than 30 different firms were cited, again with no single firm garnering more than 10% of the vote.

Couple that with the 59% of Americans who, according to a survey from The Smiley Group and Nationwide, say they do not have a strategy in place to manage retirement income, and it is no wonder that the victor in the arms race for retirement dollars is still anybody’s guess.

Product Selection

“We’ve found a variety of factors responsible for this seemingly rudderless market, not the least of which is the incredibly high expectations of today’s retirees and pre-retirees,” says Cogent Principal and Co-Founder Christy White. “In theory, pre-retirees love the idea of a guaranteed paycheck but, in reality, they are unwilling to give up control of their principal for too long—and certainly not forever.”

That sentiment is reflected in data from EBRI that said only 46% of workers were very or somewhat likely to purchase a guaranteed-income product or select a guaranteed-income option from an employer-sponsored retirement plan. Only 14% of retirees surveyed reported that they purchased a financial product or selected a retirement plan option that pays them a guaranteed income each month for the rest of their lives.

Adviser Voice

Advisers surveyed by PLANADVISER earlier this year seem to agree that client interest still is lacking, but advisers see the savings problem (more than three-quarters of those advisers surveyed say less than half of their clients’ retirement participants are on track to reach their savings goals by their intended retirement date) and appear to be interested in finding solutions. In fact, 51.8% of advisers said they believe that plan sponsors have a responsibility to offer retirement income products or distribution strategies to retiring or retirement participants, and more than half of advisers have recommended the inclusion of retirement income investments in a retirement plan investment lineup, either as in-plan or distribution options. This does not appear to be the perspective of plan sponsor clients, however. PLANSPONSOR’s 2008 Defined Contribution Survey found that the vast majority of plan sponsors (77%) do not believe they have a responsibility to manage retirement income distributions for retirees.
However, it is still only about half of advisers, and comments to the survey were pretty evenly split. Some advisers expressed a lack of enthusiasm for income products: “No product is a solution. The best approach is a diversified portfolio based on time the money is needed,” one respondent said.

Others took specific issue with the products available now, citing common concerns: “There are still too many question marks about some of these products—portability, fees, actual performance, etc.,” noted an adviser. “They are poorly understood by the investors. The disclosures are written so that the investors do not know what they are buying, paying in fees, or giving up in liquidity and flexibility or the credit risk in these vehicles. We need considerable innovation in this area,” wrote another.

On the other side, comments, including “This is the most important topic in our industry today,” show that some advisers are truly concerned about how to help participants make the right decisions to have their savings last.

However, perhaps most acutely, for the retirement plan adviser who understands the importance of saving enough for retirement but has a plan sponsor client who is hesitant to get involved, this comment sums it up best: “There are not enough products out there to make a sound comparison and, when dealing with qualified money and making decisions on behalf of employees, I’m very concerned about the financial stability of the companies offering the guarantees. There is a big difference between buying an annuity-based retirement income product for yourself and for your employees/participants. I see this as potentially the second coming of the target-date funds problem: not enough info and/or research, yet the government wants to rush to place everyone in these programs (see QDIA), based on recent market conditions. We learned from the TDF situation that we need to take a step back, analyze the offerings, and look forward to the potential future pitfalls before shoving it down everyone’s throat. We need prudence, not a quick fix.”

Growth in this space does not appear to be slowing, but what will become of those products, and whether they are a pre-retirement or at-retirement, in-plan or post-plan decision, remains to be seen.

METHODOLOGY

In February and March 2010, approximately 8,000 online survey questionnaires were sent to financial advisers from the PLANADVISER e-newsletter database. The survey received 129 responses before its close on March 8, 2009, of which 120 were valid. The questionnaire, developed solely by PLANADVISER, consisted of 25 questions. The topics covered by the questionnaire included the retirement readiness of advisers’ clients and plan participants, their involvement in retirement income planning, their product knowledge of various solutions being introduced by investment companies, and the attractiveness of those solutions for retirement income distributions.