Data & Research December 23, 2008

Retirees Consider Reallocating Assets

In wake of the market decline, a new MetLife study found that 42% of retirees surveyed are considering reallocating their assets to products that may provide a higher rate of return.
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Almost half (47%) of those considering reallocation say they are not sure how they will do this, according to a press release from insurer MetLife, which sells annuity products.

Only 17% of those who have experienced losses would rebalance their current portfolio to get more of a return.

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One-fifth are exploring guaranteed income products such as fixed income annuities, 17% are moving or planning to move more assets to bank CDs and/or money market funds, and 14% plan to move more assets to fixed-income strategies, the press release said.

The study found more than one-third (37%) of retirees keep the majority of their assets in liquid accounts that provide ready access to assets such as CDs, savings accounts and money market funds.

But MetLife said they may be paying a premium for keeping assets in these accounts, especially if they have no present intention of withdrawing the money and are passing up potentially higher guaranteed returns elsewhere. Almost half (49%) of those with more than half of their funds in liquid accounts said they suffered market losses.

Most (83%) retirees say the interest income from their liquid holdings does not serve as the primary—or even major—source of funding for their basic needs, and 96% say “achieving consistent returns of 6% or more” is at least a somewhat important financial consideration or goal.

Passing Up Liquidity

When asked if they would be willing to give up access to funds currently in an interest-earning account such as a bank CD or money market account if they could earn a significantly higher guaranteed return, only 12% of retirees surveyed by MetLife said yes, while almost two-thirds of respondents were undecided. Of those who did not say yes, only 24% changed their minds when presented with a guaranteed return of 6% to 8%, yet 49% say that income preservation/guarantees are important when selecting savings and income products.

MetLife concluded that a lack of knowledge and understanding about the products they currently own is a factor in retirees’ indecision. Twenty-one percent of respondents say they do not know the interest rates for any of their interest-rate-sensitive accounts, and 29% only know the interest rates for some of these products. Among those who do know the interest rates, 63% say their assets are generating less than 4% per year.

“The goal for retirees right now is to achieve an optimal mix of investments, liquidity and protection products. For most retirees, this means giving up some—but not all—of that liquidity in favor of products such as income annuities that may provide more income with guarantees,” said Julia Lennox, vice president in the Retirement and Wealth Management Group at MetLife, in the release.

Harris Interactive fielded the study on behalf of MetLife from October 1-10 2008, interviewing a nationwide sample of 1,027 retired U.S. adults aged 63 years and older who own at least one of six savings/income products: 401(k), Mutual Funds outside of a 401(k) or IRA, Bank CDs and/or Money Market Account, Annuities, Savings Account, Individual Stocks and Bonds.

Compliance December 23, 2008

Bush Signs RMD, Pension Relief into Law

President George W. Bush on Tuesday signed into law a broad pension relief bill that includes a one-year moratorium on required minimum distribution (RMD) rules.
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An Associated Press news report quoted Bush spokesman Tony Fratto as saying that the White House had concerns with the Worker, Retiree and Employer Recovery Act (H.R. 7327), including that it might cause workers to actually lose benefits in the long term. However, Fratto told reporters, officials decided the bill’s benefits outweighed its potential drawbacks given “this current economic environment” and Bush included it in a handful of bills (see here) approved Tuesday.

The measure suspends for 2009 the requirement that individuals 70 1/2 and older must withdraw a minimum amount from their 401(k) plans or IRAs and that those who do not are subject to a 50% penalty on the amount that should have been withdrawn.

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A growing chorus of lawmakers and retirement industry trade groups complained that the economic downturn was putting older Americans in the position of having to sell assets into a down market. That had the potential to seriously diminish the retirement nest egg for many who would have been affected by the long-standing RMD rules.

In addition to the RMD provisions, (see “House Passes Pension, RMD Relief“), the bill eases defined benefit plan funding requirements, allowing them more time to meet those requirements (see “RMD Bill Includes PPA Technical Corrections“). The bill also offers relief to multi-employer plans.

Retirement industry trade groups argued that more companies may have to freeze pension plans, lay off workers, or even go bankrupt without the bill’s relief.

Congress approved the bill this month in one of its final acts of the year.

While the bill signed into law Tuesday offers 2009 RMD relief, the U.S. Treasury Department resisted calls to implement necessary rules to offer similar help for 2008 (see “RMDs Still Required in 2008“).

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