By

Arlington, Va.

Americans face retirement with fear and resignation. And though “hungry” for reliable information, many retirees are unsure about where to seek help.

That is a common view of retirement today, said a Cerulli Associates analyst in reporting preliminary results of a retirement study the Boston firm is compiling.

Many people who are planning to retire in, say, 10 years, really cant analyze what they will need to retire, said Cynthia Saccocia, a senior analyst at the firm

“What they need is advice,” she said here in a breakout session at a retirement income conference sponsored by National Association for Variable Annuities, Reston, Va.

However, she continued, the rise of defined contribution retirement savings plans–like 401(k) programs–has made it so that many pre-retirees now take a self-directed approach to their savings. Unless these people develop a relationship with a professional advisor early on, she warned, “self-directed accumulation may translate into self-directed retirement” later on.

Other speakers here also vetted retirement research findings, and likewise assessed issues and opportunities for the financial services industry raised by those findings. For instance:

Finding: NAVA CEO Mark Mackey reviewed a PricewaterhouseCoopers study NAVA commissioned on the value of lifetime annuitization.

Published in January 2002, this study found that “after tax income at age 65 from a life annuity exceeds that from a mutual fund by between 32.3% (immediate annuity) and 94.4% (deferred annuity purchased at age 40). And for life annuities with 10-year period certain, the comparable numbers are 27.6% and 87.4%.”

Opportunity: The findings make it clear that, “if you are super rich, you dont need a variable annuitization feature,” said Mackey. “But the rest of us need it for a portion of our retirement planning.” This is “very persuasive” information, he contended.

Going forward, annuity insurers should develop designs that offer the flexibility and liquidity todays buyers want, Mackey added. They should also offer education programs that help brokers understand the products and when to use them.

The study is “a call to action,” asserted A. Scott Logan of Sanibel, Fla., a former NAVA chairman. “Use it,” he urged the NAVA members, to show how annuities are superior products for retirement planning purposes.

Finding: In 2001, 16 insurers offered immediate variable annuities, said William Borden Ayers, principal of Diversified Services Group, Inc., a Wayne, Pa. firm that surveys the immediate annuity market. Ten other insurers offered IVA “substitutes” (deferred VAs that promote their payout features), he said, “and 22 carriers said they plan to offer an IVA product in the near future.” In general, he said, the industry, regulators, and media have all “remained focused on accumulation products, not distribution planning and retirement income.”

Opportunity: The industrys challenge is to get more focused on the problems and opportunities that retirement represents to the industry, said Ayers.

For instance, he noted, dependence, in retirement, on assets held in defined contribution plans will drive consumer demand for retirement income and individual pension solutions. Furthermore, demand for retirement income advice and planning will rise, now that investment returns no longer mask the need for such advice.

Finding: Income annuities (both fixed and variable) have become a growth market for Fidelity Investments Life Insurance Company, Boston, according to Farrell Dolan, executive vice president. Sales reached $1 billion in 2001, and now represent about one-third of the companys fixed and variable sales, he said.

Opportunity: “Its a myth, that no one annuitizes and that therefore, annuitization cant be a good thing,” said Dolan. “The reality is that, when consumers get to see this idea, it is embraced tremendously. (The industrys low annuitization rate) is an insurance industry issue, not a consumer problem.”

Finding: Cerulli has found that “outliving their income” and “paying for healthcare” are the two most important issues for pre- and post-retirees, said Saccocia. Leaving a legacy is also important, she said.

Opportunity: “Many will recognize they need help” with managing these risks, she said. Financial firms can meet this need, she continued, but she cautioned that the type of advice offered needs to be “scalable” in order to be financially feasible.

For instance when the account size is very low, she suggested, provide “guidance” or even “mass customized guidance.” But for accounts of more moderate size, add in “some touch services;” and for high net worth clients, scale up to “recurring” and “holistic” advice.

In any case, “get them early and keep them late” is the message, Saccocia said. The key, she said, is to develop long-term relationships with clients.

Finding: Many retirees who use financial advisors tend to work with advisors they have used for five or more years, said Joshua D. Dietch, a Cerulli consultant who has been studying retirement assets.

Opportunity: “You need to incubate the account and develop the relationship early, or in large part you may be shut out,” Dietch said.

Finding: Many financial planners today do not have the kind of background that leads them to start discussions with clients about topics like longevity and health care, pointed out Saccocia. But those are topics of concern to this market, she said.

Opportunity: Partnering with intermediaries in these areas might help, she said. And “it could create key opportunities for the future.”

Finding: Retirement income planning involves risk management, said Saccocia. The risks include: the security of the underlying investments in the income plan, the risk of outliving that income, the certainty that payments will continue, and insurance protection against catastrophic loss.

Opportunities: Annuities, long term care insurance, income annuities, index annuities, and similar products “can open up opportunities for people to have a much more comfortable living,” she said.

Finding: On average, less than 1% of contracts are annuitized, said Saccocia, while systematic withdrawals “are still the preferred method.” Furthermore, intermediaries who talk to clients about income options are “uneducated” about income annuities.

Opportunities: Start the dialogue about annuitization and income annuities by doing a retirement income needs analysis, she suggested, being sure to look at “secured income, supplemental income, and equity income.” Then, show how annuities can convert some of the supplemental income assets into secured–or lifetime–income, she suggested.


Reproduced from National Underwriter Life & Health/Financial Services Edition, July 8, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.