From the February 2010 issue of Investment Advisor • Subscribe!

February 1, 2010

Retirement Planning: Top Trends in Retirement

Longevity risk takes center stage while savings vehicles become available

Here's what's on the retirement planning horizon for 2010: a focus on longevity risk and new retirement savings vehicles--namely the auto IRA and DB(k)--for workers. In fact, retirement experts at Prudential say the biggest issue for the retirement planning industry to address in 2010 is longevity risk. During Prudential's 2010 Global Economic and Retirement Market Outlook, presented in early January, Jamie Kalamarides, senior VP, retirement solutions for Prudential Retirement, said that helping clients protect against loss will be of utmost importance this year. "Longevity risk is very real," Kalamarides said, and the best products to protect against loss are "guaranteed minimum withdrawal benefit products because they lock in a retirement income for the rest of your life." Indeed, Edward Keon, managing director and portfolio manager at Quantitative Management Associates, a Prudential subsidiary, stressed that while finding alpha for retirement portfolios will "always be valuable," it will be much more important going forward to help investors control risk--particularly since the inflation threat is looming.

Also on tap this year will be the likely approval by Congress of the auto IRA, which many small employers will be required to offer, but that employees can choose to opt out of. The auto IRA, which is included in the Obama Administration's 2010 budget, is designed to help those 78 million people who don't have access to retirement plans at the workplace. While Kalamarides said that Prudential believes the auto IRA is appropriate for some employers, Prudential is a big advocate of another option: multi-employer plans for small employees. These plans "allow small employers to pool their assets of purchasing power according to a standard-model pension plan that allows them to invest, much like a 401(k) plan, and allows their employees to get all of the benefits of working at a large employer," Kalamarides said. Multi-employer plans, he said, reduce the administrative burden and the cost, and create better outcomes for individuals. Prudential will be "working with Congress" on the multi-employer plan concept, Kalamarides said, with a bill on such plans being introduced this spring.

Boston-based research firm Cerulli Associates says that provisions of the Pension Protection Act bring "many asset gathering opportunities for financial services firms" this year, namely the Roth IRA and the DB(k).

In 2010, conversions from traditional IRAs to Roth IRAs will be permitted regardless of income level. "While some firms are not so optimistic about the Roth conversion impact--viewing it as potentially displacing large bases of very sticky assets--others see this as opening the door for money management," Cerulli notes in the fourth quarter 2009 issue of its Cerulli Edge newsletter.

Traditional IRAs (now at $4 trillion) "dwarfed the Roth version in 2009, but the 2010 provisions offer a one time boost for these assets that will be measurable," Cerulli reports. A recent survey conducted by Cerulli of IRA providers "indicates that many firms see this as having a great impact on asset and account growth."

As of January 1, employers could also start offering the DB(k), a new retirement planning vehicle that purports to blend the guarantee of a pension plan with the ease-of-use of a 401(k) plan. Cerulli calls the DB(k) "the buried gem" in 2010 retirement planning. The major advantages of the DB(k), Cerulli says, relate to compliance concerns. "These plans are exempt from typical top-heavy or non-discrimination 401(k) testing rules so they can be skewed toward highly paid workers," Cerulli notes. "They also have simplified filing requirements when run in tandem with a 401(k) plan."

Kalamarides of Prudential also noted that the Department of Labor plans to issue in the coming months a request for information (RFI) around the idea of allowing lifetime income products within qualified plans. As it stands now, he said, "401(k) plans are the only plans that have an exemption from providing annuities and VAs as the default distribution option."


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.
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