A panel on the second and final day of the Insured Retirement Institute Vision Annual Meeting in September shined plenty of light on the issue of retirement income innovation—both the need for same and what the innovations might include.
The panel included Nick Lane of AXA, Philip Pellegrino of UBS Financial Services, Marc Pester of Prudential Retirement and Stefan Hubrich of T. Rowe Price.
Lane, senior executive director and head of U.S. life and retirement for AXA, kicked off the discussion by saying that in retirement planning, “the demand side is well-documented,” but the supply of advisors to help with that demand is the first challenge. To counter the trend of fewer advisors, he called on the industry to “recruit and bring more women into the industry itself; if we had more women we could meet more demand.” (See “Seen and Heard,” Investment Advisor, October 2014.)
Further, Lane called for “the institutionalization of insurance as an asset class.”
Just as “Bill Gross and PIMCO institutionalized bonds are an asset class” among investors, “insurance should be an asset class; a piece of the pie chart” in clients’ retirement plan that’s noncorrelated to the ups and downs of the markets, and provides tax deferral and guaranteed income with better risk-adjusted returns than traditional stock-and-bond portfolios alone.
Lane called insurance “the putter” in clients’ retirement golf bags—“you drive for show but putt for dough”—and that the industry “can’t wait until they’re retired to give them a putter.”
In addition, Lane said that what “we learned from the financial crisis is to make sure you take care of your tail risk.”
Lane lauded the industry’s newfound focus on the outcomes of retirement planning, helping retirees take care of their medical costs in retirement and “being prepared for the unknown.” Lane also noted that the industry must address “financial protection for the modern family; we have to redefine our notion of family to protect it going forward.”
He closed by calling for greater participation by both defined contribution plan participants and individuals, and a warning about increased longevity which will remain a challenge for asset managers and insurers: “the first person who will reach age 150 has already been born.”
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 clients’ needs, including their “living needs and health care needs” in retirement.
Through his experience at UBS, where Pellegrino sits on a monthly annuity product committee, 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-worth client,” some advisors think “the product has to be complex; it doesn’t.”
Pellegrino said that regardless of the sophistication or wealth of the client, “they want simplicity.” So he urged the audience members to ask themselves when considering a new annuity: “Can we explain this in three or four bullets?” 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 to 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, 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. That’s because “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 of what works in retirement income planning. “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 investments 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 retirement income planning.
“Retirement income,” he said simply, “is a financial planning problem,” and advisors should “not go to the products immediately.” Unlike asset accumulation—in which “we’ve done okay” 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 is “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 [you] can deal with uncertainties that will arise.”
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.”
Going back to target-date funds, 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.” He argued that “the need for liquidity and flexibility” is of paramount importance for retirees’ investments.
Pellegrino of UBS had the last word on the panel. “We pat ourselves on the back during the annual [IRI] 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 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.”