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It’s a well-known fact: more and more advisors are relying on retirement planning services to boost their bottom lines. As more advisors enter the retirement planning space–either by advising individual plan participants or counseling plan sponsors–it’s crucial for them to stay on top of the myriad issues that come with the territory if they expect to succeed in what’s turning out to be a very competitive area. This year, advisors have some new variables to consider as they navigate the retirement planning landscape–namely qualified default investment alternatives (QDIAs), the use of structured products by the retail market, and the emergence of cross-silo income products. But the ever-present healthcare issue, advisors’ fiduciary duties (which are becoming increasingly important), longevity insurance, the threat of a looming recession, and volatile markets will also play key roles in advisors’ retirement planning schemes as the year progresses.

While we’ve written before in these pages about the dire Medicare situation, it will continue to be an issue advisors must monitor this year as they help their clients with healthcare planning. The ever-important rollover market, too, has also been a centerpiece of our coverage, and remains an issue advisors can’t ignore. After all, says Dallas Salisbury, president of the Employee Benefit Research Institute (EBRI) in Washington: “The IRA is where future growth will be in retirement assets as more and more funds are rolled over.” However, he notes, “capture [of these assets] will be a big challenge for all in the retirement space.” (See rollover sidebar below)


Advisors, too, are dealing with a different economic environment this year. Even before the second month of the year arrived, the Fed had cut rates by 1.25% to bolster a weakening economy and concerns over the banking system. While talk of a recession has been on nearly every economist’s lips, the Congressional Budget Office (CBO) said in late January that it didn’t expect the slowing U.S. economy to slip into a full-blown recession. What is expected, however, is for the U.S. budget deficit to balloon to $219 billion, up from last year’s $163 billion shortfall; and 2008′s deficit doesn’t include any likely budget effect stemming from the economic stimulus package wending its way through Congress that could cost $150 billion.

Issue 1: Finding Income

Astute advisors, of course, have structured their clients’ portfolios to weather market downturns–helping those clients in retirement to still maintain an adequate income stream. While income products have been all the rage over the past couple years as retirees’ needs have moved from accumulation to distribution, a new breed of cross-silo income products are being created, and have the potential to be created, that will continue to help clients weather bumpy market environments, says Francois Gadenne, president of the Retirement Income Industry Association (RIIA).

While accumulation products have traditionally included mutual funds, annuities, and options–all in-silo products–Gadenne says, the first cross-silo product innovations–blending investment with advice–to come out of the accumulation world came in two flavors: target date funds and separately managed accounts. Separately managed accounts have been packaged closer to an advice process, while target date funds are packaged closer to an investment product, he says. “The one that’s been more successful is the one packaged as a product, target date funds.” (See sidebar on target date funds)

An interesting cross-silo product that’s taking shape now, Gadenne says, is the Guaranteed Minimum Income Benefit (GMIB) rider that’s being attached to variable annuities. “If you take a look at the GMIB, it is actually a three-way cross-silo product,” he says. “It guarantees an account level that can be annuitized.” It crosses three silos because first, it’s an investment product. “You are long a portfolio of risky assets,” he says. The GMIB is “also an insurance product where you have an annuity, and it’s also a hedge, actually two. One hedges you against the risk of having market returns below some level of expectation. So it’s a hedge against lower than expected returns on your long risky portfolio. But there’s also a hedge on interest rates because you have a purchase [rate] on the annuity so if the interest rate goes below a certain level you can annuitize at a rate higher than that.”

Issue 2: Longevity Insurance

Considering all the different variations of cross silos, going forward there’s a potential of 11 types of cross-silo products, which can be packaged as a product or a process, Gadenne says. “Not all of them will be created, and of those that will be created, not all will be successful,” he says. “That’s the excitement over the next few years.” Right now, “all of the insurance companies are announcing income riders on variable annuities,” he says. “A couple of years ago the big deal was guaranteed minimum withdrawal benefit (GMWB) for life. What you may start to see are investment products that have these riders that may or may not be insurance products. You may also start to see very interesting hedge products like the Goldman Sachs QxX” index (, which launched recently. With QxX , Goldman has “created a benchmark, one for mortality and one for longevity, that can be used for swaps,” Gadenne says. “In other words, for the first time we can do swaps on mortality and longevity against a standardized benchmark. What that means is now new hedge-based products can be created that take advantage of this. That’s very different than what’s been done before.” Goldman’s QxX Web site says that the QxX.LS index swaps “are designed to allow market participants to hedge or gain exposure to longevity and mortality risks, providing reliable, real-time pricing information and execution.”

Andr?(C)e St. Martin, principal at Groom Law Group in Washington, says there’s a “huge appetite” for the defined benefit, “annuity-like protection” that longevity insurance can provide. However, “advisors and others like banks and insurance companies will be challenged to come up with products that meet that need and are decipherable,” St. Martin says. Regulators and individual investors must be able to understand the products, she says. Some longevity insurance is a straightforward annuity, St. Martin says, but sometimes the products use “separate accounts under annuity contracts where you don’t make a lump sum payment; you deposit money and there are guarantees provided as to that money.”

Issue 3: Structured Products

This will also be the Year that “structured notes and other structured products begin to make a tangible impact on the retail market,” says David Macchia, president/CEO of Wealth2k, Inc. Endowments, money management companies, and very wealthy investors have used sophisticated structured products for years. “The idea behind the structured product is to have your investment protected over a period of years, to enjoy the potential for growth linked to some other asset or function,” Macchia says. “For instance, purchasing a structured note for five years that provides a 100% protection of principal, plus a 100% participation in any gain of, say, the S&P 500. The idea is to have growth potential consistent with protection of principal.” In terms of the transition management phase of retirement, which are those years leading up to retirement and those just after retirement begins, “it becomes very important to put principal protection under the retirement asset, while also maintaining growth potential.” So in the coming year, advisors will begin to adopt techniques of asset allocation that have only been used by very sophisticated investors or institutional investors. “This means the usage of new asset classes–assets linked to commodities, assets linked to currencies–sophisticated techniques that will find their way down to the retail advisor and investor.”

Why structured products now? “Because of the changing nature of the retail investor and the sophistication of financial engineering,” Macchia argues. “You can think of this as the democratization of sophisticated investing.” This year he expects to see portfolios created for smaller retail investors that have “a lot of the dynamics of the portfolios that have been created for investors that have hundreds of millions of dollars.”

Issue 4: Outcome Investing

“Outcome-oriented” investment product development, that is, products that attempt to achieve certain results at certain times, will also be a big trend this year, Macchia says. “This is the step away from the asset allocation culture of the past. It’s something that’s definitely more outcome oriented. This is reflected both in products that don’t make guarantees as well as those that do.” He points to the newer mutual funds that have popped up at Fidelity and Vanguard “that while not guaranteeing an outcome, are managing to a specified outcome.” The same outcome-oriented strategy is also being used in the target date funds, he notes, “which have no underlying guarantees but are trying to achieve certain results at certain times.”

We’ll also see the further development of products that have “true guarantees,” Macchia says. Like Gadenne at RIIA, Macchia says cross-silo product development will take hold throughout the balance of the year. “I’m really excited about the new partnerships that can develop between financial companies that were not likely to be partners in the past, but are very likely to be partners in the future because of the demands of retirement income.” For instance, “think about the insurance company stripping away its GMWB (guaranteed minimum withdrawal benefit) rider from its own mutual fund and offering it on a partnership basis to some company that’s always been a provider of pure investment accounts. So imagine a GMWB type benefit on a separately managed account or true mutual fund.”

Prudential Retirement’s GMWB product, IncomeFlex, is now “gaining momentum” after being launched on a pilot basis in 2007, says Christine Marcks, president of Prudential Retirement. If participants are “in what we call the retirement red zone, in which they’re just a few years away from retirement,” and have opted to enroll in the IncomeFlex in their 401(k) plan, “they are in a very different place than someone who didn’t elect it because they haven’t enjoyed the downside protection that’s come into play,” Marcks says.

IncomeFlex is offered to plan participants who are age 50 or older, where, says Marcks, “sequence of return has a big impact on how long their retirement savings are going to last.” IncomeFlex can be added as an option in a 401(k) plan and is structured as five risk-based portfolios ranging from conservative to aggressive, Marcks explains, so the percentage in equities and fixed income varies depending on the profile of the portfolio.

Here’s how IncomeFlex works: At age 50, an individual can take whatever portion of their account balance they want, and put it in one, two, or however many portfolios they choose, Marcks says. Then they start to build a guaranteed income base. “They always have the market value in their account, but they are also beginning to build an income base which they use to take guaranteed income payments when they retire,” she explains. “They are guaranteed that income base will grow at least 5% per year.”

Issue 5: QDIA

As for qualified default investment alternatives (QDIA) Don Trone, president of the Foundation for Fiduciary Studies, says they represent “the single most important investment option [advisors] will ever recommend to a plan sponsor because for the majority of participants, the only money they will have invested toward retirement will be the QDIA.” Also, the “QDIA, by definition, is a multi-asset class investment option and as a result the typical QDIA is going to be too complex for the average plan sponsor to appropriately elect and monitor,” Trone says. “Therefore that responsibility is to fall back on the shoulders of the investment advisor.” The QDIA is going to be the “attention getter” this year, he says because of “the ease of use, and the fact that it will be associated with automatic enrollments.”

The Department of Labor (DOL) finalized its rules regarding QDIAs in late 2007, determining that life cycle funds, balanced funds, and managed accounts are the three suitable QDIAs. The QDIAs are designed to allow employers to select default options for plan participants that are suitable for long-term investing.

Issue 6: Defining Fiduciary Advisor

Besides staying abreast of the most innovative income-generating strategies, advisors working in the retirement planning space will have to brush up on their fiduciary duties. Trone says that before advisors even agree to be an investment advisor for a plan sponsor, they must perform “an assessment of the plan sponsor’s own fiduciary practices.” This is imperative, Trone says, because “we’re seeing the first cases coming out now [where] the courts and the regulators take the position that the professional (the investment advisor) has a responsibility to assess the fiduciary practices of the plan sponsor and cannot turn a blind eye to the plan sponsor’s shortfalls.” Check the investment options, he says, “to make sure they are worthy of a fiduciary mandate. If you’re starting with poor investment options, you’re not going to get anywhere.”

Trone says advisors should be clear that they are held to different fiduciary obligations when working as a “fiduciary advisor” as set out in the Pension Protection Act (PPA) of 2006 and when they’re acting as an investment advisor with fiduciary duties. The PPA was the first piece of legislation to actually use the term fiduciary advisor, and advisors “need to understand that if they use those two words together, it’s going to send a very specific meaning,” he says. “Of course, the PPA comes with very specific requirements that have to be fulfilled by the fiduciary advisor. Of particular note are a number of disclosure requirements that have to be made to the plan sponsor and to the participants.” But if the advisor is serving as an investment advisor with fiduciary duties, “you don’t have some of those same requirements with a plan sponsor.”

What’s more, the fact that an advisor is giving advice to a plan participant does not qualify her as a fiduciary advisor under the PPA, Trone says. “Again, very specific requirements have to be met before you can be engaged as a fiduciary advisor, and more importantly before the plan sponsor can get the benefit of the safe harbor associated with the fiduciary advisor.”

Another way to put it, says Trone, is like this: “There’s nothing stopping the plan sponsor today making a request of an advisor to sit down with key participants to provide them specific investment advice. However, the plan sponsor remains liable for the advice provided by the advisor. So if the advice blows up, the sponsor shares the pain. Under the PPA, the plan sponsor will be insulated from liability associated with that advice if the plan sponsor formally, in a written contract, engages a qualified fiduciary advisor,” Trone says. “So that provision has been out there, and what has been a surprise to me is that plan sponsors have not taken advantage of that safe harbor.”

Trone warned a group of retirement planning conference goers recently, made up mostly of advisors, that “If you have not defined your business as a fiduciary business, you’re well on your way to being out of business.” He says “the procedures that [advisors] automatically put in place any time a new prospect or client walks in the door” should be sound from a fiduciary standpoint.

Whether it’s structured products or longevity insurance, defining fiduciary advisors or finding new ways of guaranteeing income or reducing risk, advisors must keep current on what’s new in the market to retain their competitive position and to better serve their clients.

DC Bureau Chief Melanie Waddell can be reached at [email protected].


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