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Developing The New Products Needed For Boomer Payout Phase

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The boomers are coming. The boomers are here. By this time, almost all the players appreciate that aging demographics in the United States call for products that address the boomers’ focus on how they are going to support not just their current life styles, but possibly their very existence.

The dimension for these investors is economic survival into old age and, conceivably, unanticipated really old age.

Thus far, the insurance industry’s primary offering has been traditional variable annuities with optional features providing guaranteed withdrawal, accumulation and income benefits.

With few exceptions, these features–the guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits and guaranteed minimum income benefits–have accompanying asset allocation or preferred or specified investment alternatives. One company has a product in registration that utilizes investor private accounts as the funding vehicle for an insurance product; other insurers have creative designs on their drawing boards.

While these individual initiatives are impressive, they are dwarfed by the enormous potential of the retirement market. Therefore, a broader approach to product development could serve all interests. Here is why.

Putting aside important but derivative issues such as costs, profits and tax treatment, the 2 controlling concepts for insurers and investors are investment risk and guarantees.

Boomers are intimidated by the prospect of investment risk that could diminish their accumulated assets during longevity frames.

Insurers, meanwhile, are faced with the creeping reality that variable products with guaranteed benefits no longer shift the total investment risk to investors. They are confronted by uncertainty as to whether they have designed or priced the features to protect their bottom lines from the persistent volatility of the markets. In fact, a variety of actuaries and other commentators have raised concerns about the exposure of many insurers to the economic impact of the guarantees.

As a federal securities lawyer, this author is frequently distracted by the blurring of the already hazy line between what is a security and what is insurance.

Guaranteed benefits of variable products have many of the attributes of traditional fixed products. Does the insurer’s retention of investment risk morph them into riders that merit status as primarily insurance? This may be a serious question for another day, as these products continue to develop.

Today’s question is: Are there other variations on guaranteed benefits or other ways of addressing the balance between investment risk and guarantees for insurers and investors? Are there other players who should be joining forces?

More to the point, isn’t it time for investment advisors and mutual fund money managers (with their expertise in investment risk) and insurers (with their expertise in general risk management) to join forces to design additional new products that address the boomers’ payout and longevity focus?

The goal would be to go beyond the design of new underlying mutual funds with differing investment objectives or asset allocation programs.

Such a turn toward cooperation–maybe even deserving of the label “convergence”–and away from market share competition would benefit investors, the money managers, the insurers and other sectors of the financial services industry.

Cooperation between the existing industry associations seems to be a productive step the various financial services sectors could initiate.

Beyond cooperation between organizations, 1 or 2 associations have an inclusive membership policy: They actively recruit investment advisors, pension specialists, mutual fund complexes, investment bankers, distributors, and insurers.

This “open membership” approach creates a forum for creative thinking on all aspects of serving the investing public, thereby expanding the market rather than just playing market share musical chairs. It’s the direction the financial industry needs to go to be able to address the myriad of needs of boomers as they move through old age and, as stated earlier, possibly really old age.


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