A huge demand among mass affluent investors for retirement income products is building, but industry response to the trend is still in its infancy, the author of a new Aite Group report on the subject says. Greg Cherry, a senior analyst at Aite’s Wealth Management practice, says he’s seen estimates of 7,000 to 10,000 people who are retiring daily as the baby boomer generation moves into its later years.
“With those kinds of numbers coming through the pipeline, there will be even more pressure on the advisor to not only differentiate his practice but also to stay current with practices. The pressure point is starting to be felt now,” he says. Instead, there’s a “business as usual” mindset in the industry as employed investors start evolving into retired investors who are spending down their portfolios, he adds. “The industry is kind of built around AUM. It’s a lot to expect the industry to turn on a dime and shift models,” he says.
Cherry interviewed 22 senior executives in the financial services industry for his report, “U.S. Retirement Income: The Shift From Accumulation to Decumulation.” The report said executives generally agreed there is too much emphasis within the retirement income industry on building up a portfolio prior to leaving work; the investing dynamics for accumulating assets are far different from those of living off those assets.
The risks in retirement are different, too—investors can outlive their portfolios, or, if they’re transitioning into retirement, can see their portfolios’ earning potential damaged by sudden market downturns. Many investors figure they’ll just work longer. A Wells Fargo & Co. survey this month said 74 percent of middle-class Americans expect to work into their retirement, with 39 percent saying they need to work during retirement to pay their bills. But Cherry’s report says there’s a risk in this assumption, too—employers may not want to hire or retain retirement-age workers, particularly if their skill sets haven’t kept pace with a rapidly changing economy.
Some executives that Cherry spoke with told him that new compensation models are needed to encourage advisors to accommodate decumulation-focused practices. But finding such practices will take time, he says—time to develop, and time to ensure that the new systems actually work in a credible fashion so advisors will feel confident to adopt them. One possible change agent for the industry may emerge from the registered investment advisor channel, Cherry says. Smaller companies are more nimble and can try new things in a way that would be more difficult for wirehouses and online brokerages to pull off, he says.
Retirement income needs also pose a challenge for product developers. The demand by consumers for income guarantees after retirement—9 out of 10 participants in defined contribution plans want guaranteed income they can’t outlive, Prudential Retirement President Christine Marcks says—suggests plenty of opportunities await asset manufacturers. But annuities, the classic solution for such income needs, carry high fees and other baggage, Cherry says. Providing income guarantees outside of annuity structure “is not an easy thing to do. If it was, maybe we’d already see these products out there,” he says. “The trick is going to be return, and in a low-return environment that we’re in right now, it makes it doubly difficult. If the yields were higher, maybe we’d see more activity in this arena.”
Most of the executives told Cherry that more product engineering is on the horizon. Some insurers are tweaking products with an eye toward income. The Hartford this fall launched Hartford Lifetime Income for defined contribution plans. The patented product allows employees to buy shares that are converted into monthly income upon retirement. New York Life’s Efficient Income Frontier contains both annuity and equity allocations with an eye toward reducing overall portfolio risk. Last month Putnam Investments launched a new suite of products called Retirement Income Lifestyle Funds, three income funds with differing risk characteristics for investors who are retired or planning to do so soon. “One would hope that the marketplace itself and competitive forces would drive more innovation,” Cherry says.