From the February 2009 issue of Research Magazine • Subscribe!

The Retirement Mission

Retirement professionals must consider more than just financial capital.

How do you create a mission statement? Retired Col. John Dundas runs a leadership development business called Leadership Applied (see www.leadershipapplied.com), and he teaches the following about creating a mission statement:

Task (What) + Purpose (Why) = Mission.

He also gives the following example: "We the People of the United States, [Why] in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, [What] do ordain and establish this Constitution of the United States of America."

RIIA' mission statement follows his advice: [Why] RIIA helps investors, distributors and manufacturers in the financial industry transition from investment accumulation to retirement management and income protection by [What] providing the space, discussions, communications, research, education and standards that derive from its unique perspective: the View Across the Silos.

Or put the other way around: [What] RIIA provides the space, discussions, communications, research, education and standards that derive from its unique perspective -- the View Across the Silos -- to [Why] help investors, distributors and manufacturers in the financial industry transition from investment accumulation to retirement management and income protection.

If you have read last year's columns, you are familiar with the work-product of RIIA's committees that implement the mission. You should also be familiar with what happened in the financial industry during the last third of 2008. Things changed in unexpected ways. Valuations and business models were shocked in ways that our accumulation-focused historical record and risk models did not help anticipate very well.

Interestingly, RIIA's View Across the Silos has been changing with the changes as well. To this end we have formulated a description for the new retirement-focused job of the retirement management professional (RMP) and introduces RIIA's work on a matching professional designation, the retirement management analyst (RMA).

The Job

A retirement management professional is responsible for helping investors plan, implement and manage every phase of their pre- and post-retirement life in a more holistic fashion to achieve and to maintain their desired standard of living.

Specifically, a retirement management professional needs to develop customized plans at the appropriate level of detail, including:

o Human capital: lifecycle work plans, longevity, personal lifestyle and extended family expectations

o Social capital: existing family, community, corporate and governmental retirement support and benefits

o Financial capital: collars around financial expectations creating a floor under the investor's retirement risk while retaining potential for upside appreciation

The retirement management professional implements, monitors and adjusts the financial capital plan as necessary during pre- and post-retirement phases and assists the investor in a realistic self-assessment of all aspects of their plan during implementation.

The Qualifications

A retirement management professional needs to achieve and maintain proficiency in:

o financial management at least on par with a certified financial planner

o insurance product management and underwriting at least on par with a chartered life underwriter

o demographic theory, psychology and psychometric methodologies to facilitate client guidance on human capital decisions

o macroeconomic and capital markets theory in order to support investment-allocation decision making on par with a chartered financial analyst

o risk management techniques and their integration into a life-cycle plan

o ethical standards as both a financial fiduciary and life counselor

RIIA can provide an umbrella designation (RMA) that is based on its retirement income and retirement management body of knowledge (BoK). This BoK seeks to take into consideration both the traditional accumulation-focused knowledge as well as the new retirement-focused material currently being developed in academic circles and by commercial practitioners. RIIA's plan focuses on building its BoK and its matching alliances with other organizations before it launches the RMA.

The Implications

Retirement management professionals need to consider investors' human and social capital as well as their financial capital. To illustrate the relative importance of these three capital sources of retirement income, consider the following: The Congressional Research Service November 7, 2005 report for Congress titled Topics in Aging: Income and Poverty Among Older Americans in 2004, by Debra Whitman and Patrick Purcell, contains figures in its Table 1 on page CRS-4 suggesting that median annual inflows into the personal income statements of current retirees (age 65 and above) included:

o Income from human capital:

- Wages: $15,000

o Income from social capital (Note: A full consideration of social capital should also include support one receives from family, church and the various levels of communities one may belong to):

- Private defined benefit plans: $6,720

- Public defined benefit plans: $15,600

- Social Security: $10,399

o Income from financial capital:

- Annual income: $952

Take another look at those numbers. Clearly, the retirement management professional needs to focus on more than just financial capital.

During RIIA's 2008 annual meeting and awards dinner, our lifetime academic achievement award recipient -- an award presented by Research magazine -- was Professor Moshe Milevsky. Later during the conference, Moshe pointed out in a side conversation that social capital has been ignored for too long and that this was quite surprising if you were to consider that it was the primary source of retirement income for millennia and that for many people it very well still may be the primary portion of their retirement plan. He also pointed out that a retirement planning process should really start with asking questions about the investor's social capital and its impact on providing a retirement income. We at RIIA could not agree more. Starting with an investor's social capital should be a best practice, as it seems validated in facts as well as common sense.

Let's expand on the idea a little more: Our considering financial capital as a generalized source of retirement income is a situation that began in 1820, when real growth in per-capita GDP for Western nations changed from a long-term historical level of more or less 0 percent to a sustained 2-plus percent. This is what the adoption of new technologies and the Industrial Revolution made possible. This is also what made it possible for society to consider offering pensions. Between the end of the Roman Empire and the start of the Industrial Revolution, your pension was more or less your children.

The first pension plan was the German national public pension program founded in 1889 and associated with Otto von Bismarck. For comparison purposes, back then, U.S. life expectancy at birth (1900) was 49.2 years and the German retirement age was set at 65. Later, on August 14, 1935, the Social Security Act was passed and by January 1937, Social Security was "open for business." As William Bernstein put it in a 2002 paper, economic change made retirement promises possible. Retirement -- based on more than your children -- happened because we could afford it, perhaps for the first time in history.

In light of the financial crisis of 2008, it appears that many institutions have made retirement promises that cannot be cashed. Now that asset values have dropped more than any one of us expected, what retirement can we afford? Hopefully, in light of all the above, we can all see that considering human and social capital as well as financial capital should be part of a solution to our increasing retirement funding problem.
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Francois Gadenne is chairman and executive director of the Retirement Income Industry Association in Boston; see www.riia-usa.org.

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