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.
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.
Work on the products, he urged the audience. “The simpler, the better.”
That comment resonated with the opening statements of Mark J. Mackey, president and CEO of NAVA, who said the VA industry needs to simplify its products.
The industry can be very proud of its product innovation, Mackey said. Its new products and features, such as living benefits, “are very responsive to consumer needs,” but all too often “our customers feel like they need to have an MBA to understand what they’re looking at.”
Other things that Mackey said the VA industry needs to do are:
o Move toward greater transparency. “Too many times, when consumers look at a variable annuity, they see a completely opaque mystery,” he said. “They don’t see the fee structure and other elements.”
o Assume more of a consumer advocacy role. “We need to be willing to change in ways that will benefit consumers and address concerns raised by regulators. I believe remedies can be fashioned that will blunt much of the current criticisms while at the same time leaving the industry in a healthy and strong financial position.”
o Educate the regulators, media and public. “Education alone cannot solve the industry’s problems,” Mackey cautioned. “It must be combined with transparency, simplicity and consumer advocacy in order to be effective.”
Pozen’s other remarks included a review of the American savings dilemma–now familiar territory to VA executives–and the increasingly slow participation rates in qualified defined contribution plans.
People say they don’t save more because they don’t have enough education or knowledge about retirement, he observed. “I think that’s bogus. I think it’s lack of discipline. They just don’t do it. They don’t calculate it, set up a plan and have some discipline. [But] if they don’t do it, they will never have it.”