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How Retirement Saving Is Changing

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Changes in the way people are saving for retirement will result in changes in the tools needed to help them save, according to senior management at MFS.

Complementing management’s long-term view on how people will save for retirement going forward was an assessment of the current state of the securities markets that MFS executives offered during the Boston-based company’s annual review here earlier this month.

During the presentation, Michael Roberge, executive vice president and chief investment officer, discussing fixed income securities, cited several reasons to remain invested in them, including the need for asset allocation.

But another reason Roberge noted is a demographic shift in which baby boomers are nearing retirement and need a portion of their portfolio to consist of more conservative investments so that they can be assured of a certain level of income in their retirement.

To date, he explained, the focus has been on accumulation, but a “$1 trillion opportunity” is in the offing. Roberge cited figures indicating that by 2020, more than two-thirds of all investable assets will be controlled by households in the income protection/preservation mode. Those investable assets include pension accounts such as 401(k)s and IRAs.

By 2020, it is estimated that a total of 14% of those investable assets will be held by consumers age 75+; 22% held by those age 65-74; and 31% held by those age 55 to 64, Roberge said. (See chart.)

Data also suggests that older consumers are more likely to hold more conservative investments in their 401(k) accounts, he added. Roberge referred to 2004 data that found that the average asset allocation in 401(k) accounts of those in their 20s included 20.1% in fixed-income securities and 51.6% in equity funds. For those in their 60s, however, fixed-income securities made up 38.1% of accounts and equity funds, 36.5% of accounts, he added.

Joseph Flaherty, a senior vice president and co-director of MFS’ quantitative solutions team, also noted that the boomer age group is edging closer to retirement.

Consequently, he said, there needs to be a shift in response to those individuals, including “simplified products and solutions.”

Those efforts to provide products that meet that need will increase as consumers become more dependent on defined contribution plans, he added. Defined benefit plans for current retirees contribute 20% of retirement income share, but by 2030 that number will decline to 9%, he noted.

Products such as lifetime funds and funds that combine goals of income, growth and stability will help clients prepare for both the trend of greater reliance on their own savings, as well as the phase of their lives when a steady income stream is needed, Flaherty said.

Traditionally, when consumers relied on defined benefit plans, mortality risk was taken care of for them, according to Flaherty. But now Americans need to manage investment, mortality and inflation risks, he continued. So, “what they want is an annuity, but they don’t want to call it an annuity.”

Flaherty said there could be a “bright future” for index annuities, but they need to be simple and the fees can’t be too high.

MFS management also offered an assessment of the current investing environment.

James Swanson, a senior vice president and chief investment strategist, said that ‘recessionistas’–those who are predicting a recession–may be disappointed in 2007. He cited factors such as a “sound” debt-to-capital ratio for companies and earnings growth in the vicinity of 18%, as well as high cash flow.

In fact, he noted, 13 cents of every dollar is going to shareholders, a number not seen since 1965.

So, he said, while growth might be temporarily slower in fourth quarter 2006 and in first quarter 2007, the economy will come out of that sluggishness.

One thing that could conceivably put the country in a recession, he said, is if Iran moved in on the Iraqi oil fields and affected the supply of oil. Under such a scenario, according to Swanson, oil could reach $100 a barrel, or $4.20 a gallon at the pump. The “Wal-marts of the world” would be impacted by such action, he noted.

David Antonelli, executive vice president and chief investment officer of non-U.S. and global investments and co-director of global research with MFS Investment Management, said he is “very positive on the equity markets in general.”

But, he noted, the large cap market is much more attractive than small caps, which are not currently offering sufficient reward. With the economy slowing, moving out of small cap stocks should be considered, Antonelli noted.

Stocks in the U.S. market look fair and could even look inexpensive, but outside the U.S. may offer even better opportunities, he said, because the U.S. has been faster at improving efficiencies.


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