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November 01, 2011 at 08:00 PM
This is it—the year baby boomers officially hit their “traditional” retirement age. They’re the first generation to fully embrace the switch from defined-benefit to defined-contribution plans and all that it entails. Unprecedented market volatility, sequence of return risk, proper distribution of assets and converting lifetime assets into a steady stream of retirement income—these are just a few of the issues with which your clients are dealing. Throw a possible double-dip recession and European implosion into the mix, and your challenge (and opportunity) is clear.
What proactive steps are you and your clients taking? What cutting-edge products and strategies are now available to ensure your clients still enjoy the quality of life in retirement of which they’ve always dreamed?
Leading Boston-based research firm Cerulli Associates has put its advisor survey, administered annually to financial advisors across the United States, into circulation for more than a decade. This year’s focus is specifically on retirement income and how advisors are addressing this increasingly pressing need on behalf of their clients.
Obstacles to Retirement Income Planning
Advisors cite the lack of consumer awareness (26%) and the time-consuming nature of planning (18%) as the primary obstacles to providing retirement income advice. Advisors’ concerns about product complexity and home office support have fallen since 2009.
While many investors anticipate living off their wealth, their frequently meager assets are likely going to result in reduced standards of living or a shorter income time horizon than anticipated. For example, while an average parent of a baby boomer retired with little to no mortgage payment and a defined-benefit plan payout, baby boomers currently considering retirement will be reliant on defined-contribution drawdowns, which will likely change anticipated spending of retirement capital. An asset-liability-driven approach is critical to understanding additional potential sources of income for the retiree, as well as outstanding commitments on retirees’ income streams.
Advisor Usage of Retirement Income Strategies
Variable annuities with living benefits (54%) and fixed-income mutual funds (37%) were the primary sources of retirement income used by advisors. Three-quarters (75%) of advisors report never using retirement income funds.
In the current low interest rate environment, it has become more difficult for advisors to develop a portfolio to meet the retirement income needs of their clients. While recent market turbulence has increased advisor interest in incorporating variable annuity products into their retirement income repertoires, few advisors have actually increased their allocation to the product. Unfortunately, many insurance companies have focused on the intricacies of various benefits rather than considering the planning aspects of the products.
Usage of Rollover Target Methods
Referrals from existing clients (68%) is the most frequently used method by advisors to target rollovers, followed by targeting existing clients with new rollovers (56%). Few advisors rely on rollovers from referrals from employers (29%) or qualified plans they have sold (21%).
Intense competition for rollover dollars is prevalent across the financial industry. The sizable assets moving out of defined-contribution plans can provide significant asset under management expansion in both new and existing relationships. DC plan providers have the inside track to contact employees following the discontinuation of investor participation in plans, but advisors are most likely to capture the high end of the rollover market due to their personal interaction with higher wealth clients. Plan providers must identify and capitalize on their opportunity to create stronger relationships with participants while they are active in their plans in order to maximize their chances of retaining assets once the participant has reached a distribution triggering event.
Average Retirement Plan Assets
Corporate DC/401(k) plans are the largest retirement plan type held by advisors, with an average advisor holding $12.5 million in assets. Assets in 403(b) plans ranked second, with an average of $8.3 million in holdings.
