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Milevsky: Why retirement income products are like jars of jam

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“There is a lot to be learned from the history of retirement income products. We need an expanded set of choices that should perhaps increase the appeal of the choices we already have,” explained York University professor Moshe Milevsky in Thursday’s keynote session of the Retirement Income Industry Association fall conference in Indianapolis.

The appropriate analogy, the retirement scholar states, is with the marketing of jam, which doesn’t sell well if there is only one type on the grocery store shelf.

“You give consumers three choices, and they will buy it. With 50 choices, they buy less. It’s too much choice, which paralyzes them,” Milevsky said.  

Instead, he stated, “Give them, say, three fundamental choices.”

His talk at the industry event, which drew a crowd of about 150 advisors and other financial professionals, focused on the need for a tontine-like product that investors could compare with annuities.

Tontines, developed in the 1600s in Europe, are basically partnerships in which the creditors or recipients obtain perpetual life-rents or annuities by lending an entity (like a government) money. Tontines require that payments of those who die accrue to the survivors, which generally means the survivors receive higher payments over time as the pool of recipients diminishes.

(Milevsky spent a month studying the first tontines and their investors in England recently and then wrote a book based on this research.)

Such an arrangement, Milevsky, says would add some “jam” to the retirement-income shelf. “Give [investors] some more jam – like a tontine and an annuity. We put more jam on the menu of options, so they appreciate the jam that’s already there.”

If the industry isn’t prepared to rollout such products, it should “at least introduce some tontine thinking into the retirement income lexicon,” he says. “Let’s share some risk … [and not just] guarantees.”

At a practical level, such products would need to be given an equity or debt structure, provisions for legacy values and options that would allow investors to buy more of them over time.

The important point when considering such innovation, Milevsky says, is not to get bogged down in the details – though, of course, they matter. Rather, the industry should focus on “using tontine principals in such a [retirement-income] structure.”

It’s possible that asset managers could jump into such products before insurance companies do, he adds. “While it’s easy to perceive impediments” to their development, “it’s time to dig deeper.”

Industry players need to experiment with the concept, Milevksy acknowledges. “If anyone in the room does it, call me. I am in.”

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