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Tackling the Retirement Income Challenge With Innovation

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A panel on the second and final day of the IRI Vision Annual Meeting shined plenty of light on the issue of retirement income innovation — both the need for same and what the innovations might include.

Moderated by Suzanne Siracuse, publisher of InvestmentNews, the panel included  Philip Pellegrino of UBS Financial Services, Marc Pester of Prudential Retirement and Stefan Hubrich of T. Rowe Price (the cogent remarks of a fourth panelist, Nick Lane of AXA, can be found in a separate ThinkAdvisor article, Insurance: The ‘Putter’ in the Retirement Golf Bag).

Pellegrino, executive director and head of annuities at UBS, said his company’s approach is to “help our advisors position themselves as ‘longevity advisors’” in order to become the advisor of choice for their clients. The conversation about retirement and longevity, he said, begins with a “solid financial plan,” which helps that advisor understand the client’s’ needs, including their “living needs and health care needs” in retirement.

Through his experience at UBS, where Pellegrino sits on an annuity product committee that meets monthly,” he said “simple is better” when it comes to products and clients. “Even though we focus on the high-net-worth and ultra-high-net-worh client,” some advisors think “the product has to be complex; it doesn’t.”

Pellegrino said that regardless of the sophistication of wealth of the client, “ they want simplicity.” So he urged the audience members — many of them his peers in the annuity space — to ask themselves when considering a new annuity: “Can we explain this in three or four bullets? What’s the issue and how can we address it in three or four minutes.” In addition, he urged product manufacturers to “remember it’s all about income. That’s our core business; the client is concerned with living 20-30 years in retirement” and needs that income to do so.

Pester, senior vice president of Prudential Retirement, shifted the conversation to the defined contribution marketplace. “It’s the primary source for their retirement income,” he said.

The industry has been focused on accumulation within the DC plan, on “optimizing deferral rates,” but now the focus should be on decumulation issues like “sequence of returns risk and conversion risk,” looking at a DC account value in terms of an income stream, and most important, dealing with longevity risk, since “not running out of money” is overwhelmingly the top concern of people in retirement.

Prudential services 7,000 retirement plans, so Pester said the company had a pretty good idea on what works in retirement income planning through research on those plans. “Plan participants with an income guarantee saved 38% more than those without” such a guarantee, he reported, and also tended to “stay the course” in their allocation. Those without a guarantee during the financial crisis moved their ivnestments to “fixed income and stable value and missed the 200% market increase” that started in March 2009.

Stefan Hubrich of T. Rowe Price represented, as he said, the “asset management industry” on the panel,  but noted that T. Rowe is also a “big target date fund provider and recordkeeper” and subadvisor for several variable annuity platforms, giving the company its own data-based insights into what works and doesn’t in retirement income planning.

“Retirement income,” he said simply yet strongly, “is a financial planning problem,” and advisors should not “not go to the products immediately.” Unlike asset accumulation, in which “we’ve done OK” with the Pension Protection Act, smart investment options and auto-enrollment in 401(k) plans, the industry “hasn’t figured out retirement income. It’s messy, murky and not unfolding the way we wanted with a grand plan and smart solutions. I worry it will stay that way for a while.”

Why? Because “most people don’t have a financial plan” that provides them with a “number” for the amount of retirement assets they must have that will allow them to “latch onto any kind of income stream. If you haven’t gone through that planning,” he said, you won’t be able to figure out retirement.

In the first of several blunt remarks, Hubrich said he is “pessimistic that there will be a silver bullet for retirement income.” That’s because, he said, “it’s so much more individual than accumulation. It  happens at the household level.” Moreover, he said, in retirement “distribution isn’t reversible,” and distribution is “also about an objective, while accumulation is more open ended.”

One of the ways that will perhaps allow us “to muddle through the solution” is to couple target date funds with a withdrawal strategy. T. Rowe’s research has also suggested that while the 4% withdrawal rule “gives you a high likelihood of success,” it also shows that there’s “tolerance for a slightly higher withdrawal rate.” An unabashed fan of target date funds, Hubrich said “they’re a mutual fund, so can deal with uncertainties that will arise, you can adjust” your investments more easily.

In addition to target date funds or annuities, Hubrich said there’s a “great opportunity to revise” the 4% withdrawal rate “as information happens along the way” in retirement. He suggested that bond ladders in the form of TIPS ladders that match cash is a strategy that’s “on the drawing board,” though he admitted that he was “not sure there’s a market for that.”

So how do people behave in retirement? Do they make wise choices about their investments? Do they withdraw too much or too little? Going back to the target date fund, Hubrich said “they’re very tolerant of inaction, so they’re behaviorally valuable.” People’s behavior in retirement is “all over the map. Some withdraw at 4%; others higher.” That’s because for those retirees, “with every birthday I learn something new about my longevity, or my health.” So “rational people, when they receive new information,  make a plan.”

Hubrich defended retirees’ behavior, saying “withdrawal behavior looks random and unpredictable, because life is unpredictable,” and argued that “the need for liquidity and flexibility” is of paramount importance for retirees’ investments.

Pellegrino of UBS had the last wise word on the panel. “We pat ourselves on the back during the annual meeting, and yes, we’ve come a long way since the financial crisis. Sales levels [of annuities] have rebounded, but there’s much work to be done.”

The “Holy Grail” of the annuities business, he says, is “penetration: business not growing at the rate it should be based on the demographics.”

The solution, Pellegrino suggested, is for the industry to do a better job of educating advisors and clients, and “come up with simpler solutions. We need to bring in new advisors and new clients.”

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