By Linda Koco
As boomers move closer to retirement age, there is a lot of talk among financial providers about developing modernized income planning products, programs and services–so retirees can have an income they wont outlive, says John Fenton.
But are financial providers actually developing such programs, products and services?
Experts contacted say providers are inching that way but not galloping. Still, the motion is forward and that is where eyeballs are turning.
Development activity in this area is on a “slow grow,” says Fenton, who is a principal at the Tillinghast-Towers Perrin consulting firm in Atlanta. There is interest, he says, but not a lot of action.
That wasnt always the case. Four or five years ago, he recalls a number of providers put “a reasonable amount of resources” into designing new income planning solutions via annuities. But the recession doused much of that.
Now, even though the economy is improving, there has been “no particular increase” in, and “no traction” for, income planning development activity, Fenton says.
At Aurora Consulting in St. Louis, the view is the same. “Weve had no inquiries from providers in that respect,” says Charles Butts, vice president.
One reason might be that most of Auroras clients focus on life insurance, Butts allows. Still, he says, “there is a lot of talk about income planning at trade meetings and in articles but not a lot of inquiry about developing products.”
Financial providers may be detecting “a lack of enthusiasm or interest in the concept from consumers,” Butts posits.
That may be because people still are not aware that many newer income products do offer liquidity, he continues. Also, he says, producers do not view the products as particularly lucrative, from a compensation standpoint.
The inactivity puzzles Butts. “We really dont know why its like this right now. But we do know you can do things to make income products more attractive, if that is the main concern.”
Likewise, at ClienTell Inc., a Torrance, Calif., financial education and training firm, “there has not been as much activity in this area as you would think,” says Douglas Urata, chief operating officer.
Last year, for example, ClienTell did produce a continuing education course on immediate variable annuities. “We ran about 55 workshops on IVAs,” Urata says, but “demand for this product is lower than for our other annuity programs.”
Jay Jaffee, principal of Actuarial Enterprises, Ltd., Chicago, also sees no increase in requests for income planning designs. His take: Insurers are holding back because consumers do not view the industrys income products as attractive.
“For people who have saved money for retirement, the ideal product is an annuity that doesnt kick in (with monthly payouts) until youre in your 80s or 90s,” Jaffee maintains. If people still are alive at that age, their liquid assets will probably have been mostly used up, he explains. “So, that is when income annuity payments could step in, to address the issue of living too long.”
Theres another problem, too, Jaffee cautions. “The public typically doesnt buy insurance products for the catastrophic event or for the long term,” he says. “Instead, most people want dollar-trading.” That is, if you give someone a dollar, the person wants at least a dollar back.
In short, the public does not understand how insurance works, the actuary says. Complicating matters, people usually do not see the results of insurance, as when the money is paid out in claims or benefits, he says. “They will hear about people getting lottery winnings but not insurance.”
As a result, many consumers are reluctant to put money in financial products that “pay off” many years from now, says Jaffee. That includes an annuity that would start paying proceeds when the persons age is in the 80s or 90s.
This reluctance may change with increased longevity, he suggests. In retirement, “consumers will need help with spending management, not savings management,” he says, and they will face significant exposure to catastrophic losses in the advanced years.
Fenton thinks provider reluctance to move more deeply into income planning right now reflects not only liquidity issues and lack of advisor interest but also the following:
It may be easier for consumers and financial advisors to use systematic withdrawal programs rather than income annuities or annuitization. Industrywide, he notes, roughly 2% to 2.5% of all variable and fixed annuity account values are being withdrawn via partial withdrawals.
Interest rates have been so low that a) income annuity products do not look attractive to consumers; and b) the products do not allow a lot of room for compensation incentives to sell the products.
People who own 401(k)s and other defined contribution assets may want to delay investing in an income product following retirement, until they reach their 70s.
Most producers still are accustomed to selling deferred annuity strategies.
It might boil down to people not yet knowing what to do, says William Borden Ayers, principal of DSG, a Wayne, Pa., retirement research firm.
“The biggest question for financial providers right now is asset retentionthat is, stemming the short-term hemorrhaging caused by the stock market decline of the past 3 years,” Ayers says. “With a few notable exceptions, the longer term view is not there yet.”
However, there are signs this may be changing.
In November 2003, for example, Lincoln Financial Group and Knoweledge@Wharton issued a white paper they co-authored concerning investor need to do financial planning throughout ones lifetime. It includes a lengthy discussion on planning for retirement income distribution needs.
Also in November, MetLife Retirement & Savings, New York City, launched a business-to-business ad campaign to promote income annuities. Targeted at plan sponsors and human resources executives, it zeroes in on the “significant risk employees face in retirement” and their need to make savings “last a lifetime.”
About the same time, the National Retirement Planning Coalition, Washington, D.C., debuted a study it commissioned on retirement income. Conducted by Ibbotson Associates Inc., Chicago, it identified the longevity and financial market risks that retirees face and showed how retirees risk running out of money if they live a long time.
(Note: The NRPC is a fairly new group comprising various financial organizations. Members include the Actuarial Foundation, the American Savings Education Council, the International Foundation for Retirement Education, the National Alliance for Caregiving, the National Association for Variable Annuities, the National Preretirement Education Association, and the Retirement Solutions Foundation.)
Then, in December 2003, DSG formed a Retirement Management Executive Forum. Aimed at high-level executives in various industries who want to share insights on retirement planning and income issues, it is limited to 25 members. Seventeen firms took spots right from the start, reports Ayers. “That signals growing interest in taking action.”
Meanwhile, many insurers have put income calculators on their Web sites and launched various public education programs on the topic.
And, in February 2004, the International Foundation for Retirement Education (InFRE) and the National Association for Variable Annuities (NAVA) will kick off a new income planning certification program they are co-sponsoring.
“Rollout will be in early April,” says Kevin Seibert, director-business development for InFRE, a Lubbock, Texas, retirement planning education firm. That is significant, he says, because the program will provide financial professionals with much-needed income planning education.
Industry leaders are recognizing that “advisors and internal staff need to develop a new skill set in this area,” says Seibert. This will become increasingly important as the industry prepares to meet the needs of the coming wave of baby boomers who will soon be retiring, Seibert adds.
But its not just for tomorrow, he stresses. Education in income planning is needed right now, he says, to help professionals help clients who already are retired as they seek to maximize income.
Will financial professionals take the training? Seibert thinks so. Today, 1200 people already have attained related retirement designations that InFRE offers–the Certified Retirement Counselor (CRC) and the Certified Retirement Administrator (CRA). That shows the financial professionals do want credentials in the retirement area, he says.
Also, with the improving economy, training budgets will start coming back and providers will want to resume employee education efforts. Income planning will be among the areas targeted, Seibert predicts. He bases that on results of an October 2003 poll of decision-makers at more than 20 financial companies. The executives differed on many points, he says, but “all agreed income planning education is important, necessary and something they need to do something about.”
However, he cautions, “with the exception of a few firms, most companies still need to decide what it is they want to do” to meet the needs of this market.
That fits with Fentons view. “Financial people wont just wake up one day and say, aha, were in the income market,” he quips. It will grow gradually, he predicts.
Reproduced from National Underwriter Life & Health/Financial Services Edition, January 23, 2004. Copyright 2004 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.