On the surface, it would appear that individual retirement accounts are a popular choice for Americans, with roughly one in three U.S. households owning at least one IRA. But a study just released by the Center for Retirement Research at Boston College suggests that IRAs may not be working for retirees the way they were intended.
The researchers surfaced an important finding: IRAs hold nearly half of all private retirement assets, but today most of these funds are rollovers from 401(k) plans, rather than contributions. Specifically, their study found that of the $7.8 trillion currently invested in all IRAs, most of those assets come from workers who have changed jobs and rolled over their 401(k) plan into an IRA because it was easier than establishing a new 401(k) with their new company — or because they had reached their retirement.
As reported by the Wall Street Journal on May 5th: “More than 40 years after Congress created individual retirement accounts, (this) new analysis finds the savings plans aren’t fulfilling their mission.”
In other words, most IRAs are not serving as active retirement savings vehicles anymore, as much as they are landing spots for assets that were already accumulated elsewhere. This is consistent with the results of a 2017 report by the Investment Company Institute, which found that only 11% of U.S. households contributed to an IRA last year.
The retirement savings crisis in America continues to worsen. The Employee Benefit Research Institute reports that:
* 47% of workers have less than $25,000 in total household savings and investments, excluding their homes;
* 24% of workers have less than $1,000 in savings; and
* 31% of workers are “very or somewhat stressed” – mentally or emotionally – about preparing for retirement.
If you sell annuities, you may wish use of IRAs was low because use of annuities outside of IRAs was high, but, of course, that’s not the case. Use of individual annuities as a retirement savings vehicle is also low.
This sobering reality means that financial advisors need to think more creatively than ever when it comes to identifying assets in their client’s portfolios that might be able to be leveraged in a way that generates cash. One such alternative asset may be a life insurance policy.
Life insurance is personal property, so your client can sell it just like any other property they own. The buyer of the policy gives your client a lump-sum cash payment, takes over all future premiums on the policy and then receives the death benefit when your client passes away. This transaction – known in our industry as a life settlement – enables your client to obtain roughly five to seven times the amount of the policy’s cash surrender value, according to the Life Insurance Settlement Association.
If you have roots in the life insurance industry, you know this very well. Your client may not.
If you came up through other channels, and occasionally touch on life insurance, you may not be familiar with how well-established the life settlement market.
The mechanics of a life settlement have transformed in just the past couple years. Life settlements are safe and well-regulated, but a factor that has discouraged many consumers from pursuing the sale of their life insurance policies has been an underwriting process that can be onerous, intrusive and time-consuming. With the assistance of new technology tools and more sophisticated computer algorithms, many of the leading companies in the industry have rolled out more efficient workflows that enable us to handle the most time-consuming portions of the transaction more efficiently and effectively. This streamlined application and review process can reduce the time required to complete a life settlement transaction from three months to a month or less, in most cases.
For example, our firm recently bid on the purchase of a $3 million life insurance policy that would have typically taken us about eight weeks, from application to generating an offer, using traditional methods. With a new model, we were able to respond with our final bid on the policy in just two days. This breakthrough means that life settlement companies can pass on new cost-efficiencies to your clients who are seeking to unlock value from a policy.
Findings of important new studies regarding IRAs suggest those retirement savings vehicles are not fulfilling their mission, a sobering reality that has broad implications for financial advisors striving to help their clients with retirement funding strategies. By creatively evaluating all available assets in your clients’ portfolios, you may be able to discover value where you, or they, least expected.
--- Read Why Aren't Retirement Savers Choosing Annuities? on ThinkAdvisor.