People want to know what will happen to them, financially speaking, if they live to be 80 to 98, said Robert C. Pozen, chairman of MFS Investment Management, Boston, in a speech here.
As firms work to meet the need, “it may be possible to come up with a low cost product that kicks in only if the person lives to be 80,” he suggested.
The idea came during Pozen’s keynote address on how variable annuities can help meet American’s financial needs during both the savings/accumulation and the income/distribution phases of life. He was speaking at the annual marketing conference of the National Association for Variable Annuities, Reston, Va.
VAs have many attractive features for both phases of life, Pozen said. For instance, the guaranteed living benefits features are good for people who want minimum guarantees with equity participation during the accumulation phase, he said. And, in the income phase, the lump sum payouts, systematic withdrawal plans and annuitization features are attractive.
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But in the future, VA firms need to offer more unique features to address concerns people have about the distribution phase of life, Pozen said. Planning needs to be for a 30-year retirement, he said, referencing data showing that, for a healthy 65-year-old couple, there is a 50% that one spouse will live to age 92.
To help make money last for that length of time consider using TIPS (Treasury Inflation Protected Securities) and equities in addition to VAs, he suggested. Relying solely on bonds would not be suitable, he added, because “bonds carry significant inflation risk.”
In the qualified plan arena, Pozen endorsed an approach that has a lot of currency today: Offer defined contribution products with “presumptive auto-enrollment.” The auto-enrollment makes it so employees have to opt out if they do not want to make contributions. However, he cautioned, “if you do this, you have to have a default fund–say, a lifestyle fund–[for the auto contributions], because the people really haven’t made a choice.”
In identifying future opportunities for the financial services industry, Pozen noted that since 401(k) defined contribution plans are “in the world more and more,” the annuity industry needs to look at this. For instance, look at rollovers from 401(k)s into IRAs. The industry “needs to find a way to annuitize them,” he said.
And, while VA living benefits are “great,” he said, it can take “several hours” for a person to understand them. “There has to be a trade-off between the benefit and simplicity,” Pozen said.