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Retirement Planning > Retirement Investing

The 2011 IA/Cerulli Retirement Income Study

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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.

Growth within investment consulting has driven competition down market into small corporate retirement plans, which were historically serviced by advisors. Lower margins and stiffening regulation on fiduciary duty has limited advisors’ ability to target small corporate clients as a significant source of assets. Independent, dually registered and RIA models will be best suited to apply the necessary fiduciary responsibility likely to be required upon regulatory change.

Opinion on Annuities as a Rollover Vehicle

Ideally positioned as a strategy during market uncertainty, 44% of advisors indicate that both deferred and immediate annuities would be good choices for a portion of rollover assets. Only 3% of advisors favor immediate annuities over deferred products.

Although immediate and fixed annuities are typically viewed as a nonqualified strategy, their use as a rollover vehicle has gained favor with about half of advisors. Fixed-income interest rates have been providing minimal return, so advisors have looked toward annuity options as methods to increase potential returns, while providing a minimum guaranteed level of retirement income. Conservative retirees looking to avoid the impact of market cycles are ideal candidates for the expanded use of the products.

Factors Addressed in Retirement Income Plans by Channel

Social Security (61%), longevity scenarios (55%) and budgets (54%) are the most common elements addressed in advisors’ retirement income plans. Just under a third (32%) of advisors do not deliver written retirement income plans to their clients.

As a large swath of the population enters retirement, there are a number of critical factors in flux, including taxes, inflation, Social Security and medical expenses. Federal, state and local budget shortfalls imply increases in future taxes, while the Federal Reserve is looking to continue quantitative easing at the risk of inflation. Financial plans should include multiple scenario options as well as use Monte Carlo simulation to account for large potential swings in risk factors. While BDs and product providers have attempted to create education programs to guide advisors through this process, there are still significant opportunities to create expertise throughout the advisor base in order to increase the chances of improved client outcomes.

Factors in Selecting a Variable Annuity Provider

Advisors place the greatest importance on living benefits when choosing a variable annuity provider (83%). The insurers’ financial strength (73%) and investment options (62%) ranks second and third respectively.

The two phases of variable annuities are accumulation and payout. Advisors looking to choose a variable annuity provider want to ensure that both of these phases are reached to their full advantage. During the accumulation phase, advisors are looking to gain significant return for their clients. In order to achieve this goal, advisors will look for a variety of investment options with strong performance. The payout phase of an annuity contract requires the provider to have the ability to provide the amount guaranteed to their clients. Advisors, therefore, also look for a company that is stable financially and has the ability to cover the risk they assumed.

Anticipated Change in Revenue due to Transition to Retirement Income by Channel

Revenue increases are anticipated among 73% of advisors as clients transition to the retirement income stage. Only 4% of advisors are anticipating a drawdown in their assets as a result of retirement outflows.

Advisors have been hard-wired to target and provide services to the aging baby boomer population. While rollover assets and retirement income strategies will drive revenue in the short run, advisors must develop new sources of assets that are in the accretive stage to counteract the declining balances of retirement funds or find additional services from which to draw revenue. Practices solely focused on retirees will be subject to declining assets under management, while service requirements will expand as investors rely on portfolios to support their living expenses.

Factors in Recommending an Underlying Fund in a VA

Investment performance (62%), management team experience (52%) and pricing (48%) were the top factors for underlying funds within variable annuity contracts. Inclusion of target-date funds, ETFs and multi-sector investment options were not rated as a significant importance factor for underlying funds.

Advisors directing assets into variable annuity products look for companies offering funds that will maximize client accumulation prior to payout. Quantitatively, investment performance is the critical factor to advisors. However, insurance firms should consider strategic marketing to bolster the image of the firm and management team. Annuity distributors that provide superior performance and management expertise should be able to command a high-margin pricing structure.


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