Products are not enough to meet the growing retirement income needs in the United States, said Lisa Plotnik here at the annual marketing conference of NAVA Inc., Reston, Va.
Many insurers, asset managers and banks already have products for income generation, said Plotnik, associate director, Cerulli Associates, Boston. They are also exploring product innovations–for instance, adding flexibility to insurance products that guarantee income streams.
But the industry has not yet figured out how to “position products together in a way that will last for what will be, for many people, several decades of retirement,” she said. Advisors will need to offer holistic advice, she added.
A new paradigm is needed, agreed Mathew Greenwald, president of Mathew Greenwald & Associates Inc., Washington, D.C. For instance, “the concept of asset allocation should be expanded to include risk-reducing products.”
Based on his firm’s interviews with several advisory firms, he said that current approaches have many problems.
One such problem is the predominant use of mutual funds by reps, even though many people in retirement actually need a guaranteed stream of income, Greenwald said.
Further, many advisors continue to focus on accumulation, he said. “They do not yet have a firm foundation in managing income in retirement” around 6 key risks: when death will occur, disability, inflation, market volatility, public policy and programs like Medicare, and overspending.
In addition, advisors do not always elicit information or raise topics that lead to discussions about those risks or about plans to manage them. For example, at their first retirement planning session with a client, advisors typically focus on investment risk, Greenwald said. A lot of the time, they do not also discuss longevity risk, long-term spending, inflation or the outlook for Medicare and Social Security.
Another problem, he said, is that many retirement income proposals assume that certain factors remain constant when in fact they actually fluctuate. Examples include inflation, Medicare, Social Security and spending levels (including for health care and long term care).
Even the concept of using the standard 70% replacement rate is questionable, he maintained. This rate assumes that people have reduced expenses in retirement and so can live on 70% of former income. This does not account for inflation, and it typically focuses only on the first year of retirement, Greenwald said. Further, it does not recognize that spending can go up–say, when a person responds to a “pent-up need to travel” after retirement.
Keynote speaker Joseph W. Jordan touched on some of the same points, contending that the industry “needs to think less about investments and more about investors.”
The paradigm shift that is coming will require turning assets into income and managing risk, not money, said Jordan, who is senior vice president-individual business marketing at MetLife, New York.
Traditional mutual fund illustrations, showing people not running out of money until, say, age 100, assuming 8.9% returns, are too simplistic, he said. The industry “can’t do this anymore, because people are living longer.”
Monte Carlo simulations don’t help much either, he said. “When people start thinking about turning their money into income, they will think about insurance,” he said, not investments. “They will see that there are some things you can’t invest for; you need to insure against them.”
Consumers need help with not only financial-related risks but also with understanding the trade-offs involved in reducing risk and with gaining access to tools and strategies to manage risks, noted Greenwald.
Plotnik said that in the new retirement planning model, the advisor first performs an assessment to determine what the client needs. Then the advisor develops the financial plan and finds products, investments and programs to help implement the plan.
Obstacles exist, she allowed. For instance, many advisors surveyed by Cerulli in 2006 said they believe retirement income planning is overly time-consuming, and “some are intimidated by the whole process.” Many also encounter client resistance to the process, she said.
As a result, many advisors don’t spend much time on retirement income-related issues, Plotnik said.
However, the old model–finding a product to fit the client–will not meet the need, she stressed. People facing retirement need more than products, she said. They need a plan with solutions, and one that doesn’t take too much time.
Manufacturers, distributors and advisors need to partner effectively to make this happen, she said.