In Practice November 15, 2006

Small Biz Owners Clueless on PPA

A recent poll of 507 small business (companies with 50 employees or fewer, including one-person, owner-operated businesses) owners or CEO’s/Presidents commissioned by ShareBuilder 401(k) found that many small business owners are still focusing on Social Security as a primary source of retirement income, both for themselves and their employees.
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A majority of those surveyed (61%) had never heard of the Pension Protection Act (PPA). Not surprisingly, small business owners were much more likely to be concerned with running their company than legislation that, most likely, in their opinion, does not have significant applicability.

 

Even Aware Unmoved

 

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Of the 39% who were aware of the PPA, 76% said it has no impact on their plans to offer a 401(k) plan to their employees, according to a news release on the survey. However, while the permanency of the expanded contribution and benefit limits under EGTRRA do make some aspects of offering a retirement plan more advantageous for small business owners, this might not be the best selling point for this audience. Consider that a mere 25% said they plan to use a 401(k) to fund part of their retirement income, possibly because these owners have private savings, or plan to use the money from selling their business as retirement income.

Less than 40% of small business owners offer any form of a retirement program to their employees and only 14% of the respondents currently offer a 401(k) plan to their employees – an obviously untapped market for advisers to prospect. Advisers can help small business owners understand the importance of company-sponsored 401(k) plans and other retirement benefits in supplementing our Social Security system.

For employers who don’t want to offer a 401(k) plan to employees, advisers can help them review the many other retirement plan possibilities that might better suited for their workforce, including defined benefit plans and IRA based programs.

In Practice November 15, 2006

Households Will Look to Consolidate Adviser Relationships: Study

A new report claims that many US households will decide to consolidate their assets with a single adviser in order to better address the challenges they face in retirement income planning and asset decumulation.
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That presents a multi-trillion retirement asset opportunity for financial institutions in the near future, according to a recent TowerGroup report, “Winning the Battle for Retirement Assets: Wealth Management or Product Pitch Polemics?” by Matt Schott, research director in the Brokerage & Wealth Management practice at TowerGroup. The report says that retirement assets in various plan types under the control of individual investors in the United States total $9 trillion, with business liquidation over the next decade potentially resulting in another $10 trillion in assets. However, for financial institutions to capture these assets, they must provide efficient and effective retirement income planning services for the growing percentage of the population in or near retirement.

Segment “Ed”

The market is divided into three distinct segments, each of which possesses unique requirements and opportunities that need to be addressed in helping your firm capture assets. As they age, and accumulate wealth, households are likely to move through these individual segments – from mass market to affluent to the high-net-worth financial segment during their working years — and then back down to mass market as the retirement years progress and their nest eggs get depleted.

Among the three major market segments identified in the research:

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  • The mass market (90 million households; those with up to $200,000 in investable assets) will focus on protecting assets in retirement. Their strategies will include home equity release and income generation, and, according to TowerGroup, they will look for customer contact through the Web, call center and bank branch and will use products that generate income with manageable risk to principal, including reverse mortgages, income-oriented mutual funds and annuities.
  • The affluent market (15 million households; those with $200,000 through $2.5 million in investable assets) will focus on maximizing sustainable income in retirement, and will use strategies including insurance products to protect against risk. They will look for customer contact through the Web, and an adviser and will use products including preconfigured managed money, mutual funds with systematic withdrawal plans and annuities and long-term care products.
  • The high-net-worth segment (1.4 million households; those with more than $2.5 million in investable assets) will look for programs in retirement to blend and balance lifestyle and legacy such as drawdown programs for cash flow and legacy, self-insurance and estate programs. Those in this segment will expect customer contact through advisers and their teams and also will utilize the Web. This group will rely on advisers to manage their money and will also use structured products and trusts.

To address the challenges facing the financial institutions, they “must enhance processes and technology infrastructure,” TowerGroup asserts. “Case management and budgeting as well as financial planning are areas in which financial services institutions can capitalize on retiree’s need for a financial management framework to replace the structure and discipline embedded in a working paycheck and employee benefit programs.”

TowerGroup asserts that “the winning formula” will be offered by firms that are unencumbered by proprietary product sets, and can offer independent and objective advice, such as by smaller registered investment advisors (RIAs), as well as some banks and brokerage firms.

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