Prudential Aims to Improve Retirement Saving Hygiene

The financial wellness effort could divide sector players

Douglas McIntosh Jr. (left), Srinivas Reddy (center) and John Kalamarides spent Tuesday evening selling financial services reporters on the concept of financial wellness. (Photo: Allison Bell/TA) Douglas McIntosh Jr. (left), Srinivas Reddy (center) and John Kalamarides spent Tuesday evening selling financial services reporters on the concept of financial wellness. (Photo: Allison Bell/TA)

Prudential Financial Inc. is continuing to rev up its financial wellness outreach campaign this week.

The Newark, New Jersey-based company is trying to persuade the media, policymakers in Washington, employers and consumers to see saving a significant amount for retirement to be something as automatic as getting a checkup every year, or brushing teeth in the morning.

(Related: 3 Reasons Financial Wellness Might Sting)

Prudential organized a small press conference on the financial wellness concept for financial services reporters Tuesday. The company brought three high-level retirement plan unit executives — Douglas McIntosh Jr., vice president for full-service solutions; Srinivas Reddy, senior vice president and head of full-service investments; and John Kalamarides, head of full-service solutions — to New York to tell the reporters what annuitization is, why workers need protection against longevity risk, and why they think adding income guarantees to employer-sponsored retirement plans could help everyone.

Prudential held the press conference, in part, to draw attention to a lifetime income white paper the company was preparing to release Thursday.

Here's a look at three takeaways from the press conference that might be of interest to life insurance agents and to retirement advisors with roots outside the insurance industry.

1. Prudential is promoting a package of four retirement plan design elements.

Prudential says a package of four basic retirement plan design features dramatically increase the odds that workers will end up with adequate retirement income.

  1. Enroll workers in retirement plans automatically, as the default.

  2. Make a diversified investment portfolio that shifts more toward fixed income investments as the enrollee ages the default investment option.

  3. Start with 6% of the worker's income as the default initial contribution level, and set the contribution level to increase automatically.

  4. Start putting a lifetime income annuitization feature, to guarantee that the worker's income stream will survive at least as long the worker, into effect about 10 years before the worker wants to retire.

Prudential has a financial interest in seeing more retirement plans offer income guarantees: It, like some other insurers, offers a kind of stand-alone group annuity that can convert the assets in a retirement plan into a lifetime stream of income.

Reddy said at the press conference that Prudential believes offering an income guarantee can actually improve workers' underlying retirement savings performance.

"Participants in retirement plans are not investors," Reddy said.

Sen. Orrin Hatch, R-Utah (Photo: Hatch)

Sen. Orrin Hatch, R-Utah (Photo: Hatch)

Retirement plan participants are savers, and, if they manage their assets on their own, they are likely to make mistakes based on emotion, Reddy said.

If workers have income guarantees, they are more likely to have diversified investment portfolios, in part because of the investment rules built into the income guarantee programs, Reddy said.

Those workers are also more likely to keep their assets in the retirement plan during market panics, when other investors pull out at the worst possible time, Reddy said.

2. Prudential thinks Congress could really do something about retirement preparedness issues.

Republicans hold 52 seats in the Senate. In theory, under traditional Senate rules, they need 60 votes to get an ordinary bill through the Senate, through "regular order," and 50 votes to get a budget bill through the Senate, through a special "budget reconciliation" process.

Some retirement savings proposals can fit in budget bills, because they deal with tax provisions and relate directly to the budget, Kalamarides said.

Retirement savings proposals also have an above-average chance of getting through the Senate under regular order, because many have bipartisan support, and the Senate Finance Committee is a panel in which the chairman, Sen. Orrin Hatch, R-Utah, and the highest-ranking Democrat, Sen. Ron Wyden, D-Ore., have a good working relationship, Kalamarides said.

One issue that could come up might be the idea of converting all 401(k) plans, and similar types of retirement plans, into Roth retirement plans. In a pure Roth retirement plan system, workers would get no tax breaks for making plan contributions today. Workers could make withdrawals after they retire without paying income taxes on the withdrawals.

Workers may not be happy with that proposal, but many members of Congress like it, because projections show that pure Rothification could produce about $800 billion in extra revenue for the government over a 10-year period, Kalamarides said.

If Congress really debates Rothification, it is likely to discuss proposals for applying Roth rules to just part of a worker's contribution instead of applying the rules to all of the contribution, Kalamarides said.

Congress might discuss any full or partial Rothification proposals together with retirement plan program "sweeteners," such as efforts to increase the maximum contribution, or provide extra help for low-income participants, Kalamarides said.

3. Prudential sees the structure of the U.S. financial services industry slowing adoption of what it sees as basic financial wellness measures.

Many financial professionals with roots outside the insurance industry believe that portfolio diversification is the best, cheapest defense against a decline the investment markets, and that any guarantees available will help in too narrow of a range of scenarios to be worth the cost.

Other financial professionals and financial services companies depend heavily on sales to individuals who are rolling assets out of employer-sponsored retirement plans. They and their clients may also sincerely believe that workers are better off getting assets free and clear from those plans. Some employers would prefer not to take responsibility for managing retirement plan assets, or income guarantees, for former employees.

McIntosh said the industry is already working on a potential solution for the challenge posed by the desire of former employers and former employees to separate their finances: the creation of a clearing system for guaranteed products. That way, he said, workers can shift income guarantees from one company to another about as easily as they now shift the plan assets from one mutual fund company to another.

Prudential executives are dealing with the other objections mainly by arguing that guaranteeing workers access to lifetime income seems to fit well with the current focus on retirement plan sponsors and advisors acting in the best interests of the plan participants.

"It makes sense, and it's the right thing to do," the company says in the lifetime income white paper.

--- Read Prudential Hires HR Chief on ThinkAdvisor.

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