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The Income Conundrum

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What’s the biggest issue facing all retirees, particularly baby boomers? You guessed it: having enough income to sustain them through what will likely be a longer retirement than they anticipated. To address retirees’ income issue head on, financial services executives have joined up to launch a new trade group, the Retirement Income Industry Association (RIIA).

Created in late November of last year and based in Washington, D.C., RIIA is a not-for-profit trade group designed to be a think tank where top executives from all segments of the financial services arena can gather to discuss the “next generation of products” that must be designed to tackle the retirement income dilemma, says Francois Gadenne. Gadenne, the president and CEO of Retirement Engineering, Inc. ( in Boston, is the founder and chairman of RIIA. The founding members of the group are executives responsible for the retirement income or annuity divisions of their companies–people who can actually “make things happen,” he says. RIIA, Gadenne pledges, is “not going to be a study committee of people who issue reports but can’t do anything.” Among those 15 founders are Jerry Golden, president of the Income Management Strategies Division at MassMutual, and Rick Nersesian, senior VP of UBS.

Within the next 10 years, “tens of trillions of dollars are going to become income money, or money in motion,” Gadenne says. This money in motion “has already started to happen.” There is $7.5 trillion dollars in pension plan assets right now, he says, held mainly by boomers. Then there’s “anywhere from $10 to $30 trillion of other assets that will become available to be turned into income.” Plus, the annuity business, both fixed and variable, now has $1 trillion in assets, he says. The question is whether insurance companies will be able to satisfy all of retirees’ income needs through existing products. Will insurance companies “multiply their business tenfold? It’s not very likely,” Gadenne says, because “that would be far more longevity risk for them to put on their balance sheets than they are prepared to do.”

The current shift from the accumulation phase to the distribution phase is resulting in a “very different way of advising the client, and a very different way of doing the manufacturing and actual money management in the [client's] allocation,” Gadenne says. In the accumulation phase, it’s all about total returns and growth, but with the shift toward the distribution phase, the top priorities are risk management and protecting the downside, he says. Clients are now asking their advisors, “Where is my income, and what are you going to do about it?”

Engineering New Products

The solution is not in “the same old, same old” products, Gadenne argues, but in “new products that don’t exist yet.” That’s where Retirement Engineering and the members of RIIA come in. Retirement Engineering, a research and development company launched in September 2001, has been hard at work inventing product designs and packaging solutions to address retirees’ income needs. The company licenses the rights to its product ideas to manufacturers and distributors, who then “turn them into products that go to market,” Gadenne says. In 2003, Prudential became the first company to license the rights to an insurance version of a Retirement Engineering product idea called the Genuine Retirement Income Security, or GRInS. The firm’s Web site calls GRInS “the DC fund option that offers DB retirement income security.” At the time Prudential licensed the product, the insurance company “got distracted by its acquisition of Cigna,” and has yet to bring the product to market, Gadenne says. Retirement Engineering has other licensing agreements in the pipeline, but none the firm is able to disclose yet, according to Gadenne.

Most of the products Retirement Engineering designs are what Gadenne calls, “synthetic deferred annuities,” or “products that are about income, but that may or may not be annuities.” Many of the designs the firm has hatched can be implemented in both an annuity or a security. The firm also develops products that are packaging concepts “that can be applied to existing and new products” so that they are “easier to sell, and easier for the customer to understand,” he says, referring to packaging products like the Future-Income Denomination, DBinDC, and IncomeAtRisk.

Future-Income Denomination can be applied to new products as well as old ones like annuities or securities, and allows investors to “buy a dollar or more per month [of a certain product] at a maturity of your choice,” Gadenne says. The product “has a daily price.” Existing financial products may have an NAV, he says, but that doesn’t provide any indication of what the investment will provide in terms of future income. “Products that have a NAV in the accumulation culture and equity culture are fine, because the value proposition is, ‘Let’s go build a mountain,’” he says. “However, when the value proposition becomes managing income risk, what you need are products where what you buy is a unit of income.”

Other product designs include PensionShares, which is a mutual fund version of GRInS, Gadenne says. Then there’s Normalized Annuity Options, which the company’s Web site describes as “securitization of longevity risks to provide guaranteed income wraps of brokerage accounts and securities products,” and LIncS, which the Web site says are “future-income denominated immediate annuities that allow participants and investors to dollar-cost average purchase of retirement income units.” There’s also a product design called Future-Income Life-Cycle Funds, which are dubbed the “next generation solutions for both rollover and retirement income,” and Future-Income Closed-End Funds.

Annuities Alone Not the Answer

When asked if new types of annuities will be the product of choice to address the retirement income challenge, Gadenne answers bluntly: No. Annuities will definitely play a role, he says, but “I don’t think they will be the larger player.” Applying product-packaging solutions for existing products such as Retirement Engineering has done, as well as new products that have yet to be created, will fulfill the income demand. “I would suspect the packaging will be more in securities than insurance contracts,” Gadenne says. “I can sell you my shares of GM and you can sell me your shares of GM,” but “you can’t sell insurance contracts, and [that's] extremely limiting.” He adds: “To satisfy the large demand for income, we are going to want to have products that are more like securities and less like [insurance] contracts.”

Another priority for RIIA will be to provide training programs, best practices, and certifications for investment advisors to signify they are retirement income specialists, Gadenne says. “In the accumulation phase, it’s understandable that [advisors] have a CFA or CFP” designation, he says. But “when you get into distribution, the game changes. It’s risk management, which is much more sophisticated and complicated.” Gadenne says RIIA’s goal is to create a certification–or multiple certifications–that would be recognized by clients, much as the CFP mark has become. “That’s why we have an association–so we have the validity of the entire industry.”

It’s crucial for advisors–who are primarily still entrenched in the accumulation phase–to realize that “as this transition from accumulation to distribution takes place, the products, training, and software tools [they are using] are no longer well suited,” Gadenne says.

In announcing the creation of RIIA last November MassMutual’s Golden said the tremendous shift from wealth accumulation to retirement income security will require “new skill sets and, perhaps, even an entirely different financial planning mindset.” Individuals approaching retirement “will need advice on longevity planning, managing withdrawals from retirement funds, intergenerational wealth transfers, and a host of other complex retirement planning and wealth management issues, in addition to their asset allocation decisions.”

RIIA plans to develop a database for its members of products and services being used across wealth segments–mass market, emerging affluent, and affluent and high-net-worth. RIIA also plans to hold its first conference, “Managing Retirement Income: Innovative Strategies to Capture and Retain Retirement Income,” in Boston from February 27 to March 1. The membership fee for regular members is $10,000 per year. An associate member fee for suppliers to the industry such as lawyers, research firms, and so on is $2,500 per year. “The purpose of the association is to attract everybody–distributors, manufacturers, and intermediaries,” Gadenne says.

Washington Bureau Chief Melanie Waddell can be reached at [email protected].


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