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The Retirement Income Opportunity: ROLES FOR FINANCIAL SERVICES PROVIDERS. Jerome P. Kenney. February 12, 2007. Demographics Are Eye-Popping: Retirement Age Population Will Increase 63\% From ‘00 – ‘20. Assets Will Double by ‘12. Change in Population Growth 2000 – 2020.

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slide1
The Retirement Income Opportunity:

ROLES FOR FINANCIAL SERVICES PROVIDERS

Jerome P. Kenney

February 12, 2007

slide2
Demographics Are Eye-Popping: Retirement Age Population Will Increase 63% From ‘00 – ‘20. Assets Will Double by ‘12

Change in Population Growth2000 – 2020

Assets Held by Investors Over Age 60 ($ Trillions)

38.1 Million

CAGR

2006 – 2015: 12.1%

16.1 Million

10.1 Million

6.1 Million

GrowthRate 12% 8% 13% (5%) 9% 76% 56%

’00-’20

Source: US Census

Source: Cerulli Associates – Retirement Edge, November 2006

1

slide3
Retirement Plan Assets = 44% of US Fin Wealth. These Plans + Taxable Assets of People >55 (56%) = $25.2T or 75% of Total

Total Financial Wealth – Q3 2006

$33,375

Taxable Assets

$18,538

56%

Retirement Plan Assets

$14,837

44%

Dep, CDs,MMFs

$6,071

EQ, FI, Ins, MFs

$12,467

IRAs

$3,958

DC

$3,420

PrivateDB

$1,842

Gov’t Plans

$4,026

Annuities

$1,591

Age

20%

80%

53%

47%

55%

45%

>55

74%

26%

39%

61%

64%

36%

50%

50%

<55

Source: Federal Reserve Flow of Funds, ICI and Merrill Lynch segmentation estimates

2

growth in the retirement market will come from retail oriented programs dc iras annuities
Growth In The Retirement Market Will Come From Retail-Oriented Programs: DC, IRAs, Annuities

DB

Annuities

DC

IRA

($ Trillions)

$2.7

$1.9

$0.9

3.6%

2.6%

7.4%

7.4%

6.5%

7.8%

10.7%

10.6%

Growth

Driver:

  • Market appreciation only
  • Retirees seeking income
  • Contributions
  • Auto enrollment
  • Auto escalation
  • Rollovers
  • Contributions

The Individual Will Shoulder Responsibility For Retirement Savings, Investments, And Creating Income From Assets

3

slide5
The Outlook for Net Flows Is Positive For IRAs, DC & VA’s. In ‘07 Expect >$180 Billion in Flows From These Products

Net Flows

($ Billions)

IRAs

DC

VariableAnnuities

DB

Source: Department of Labor, Federal Reserve, Cerulli Associates and Merrill Lynch estimates on variable annuities.

4

the pension protection act ppa of 2006 will help increase dc savings
The Pension Protection Act (PPA) Of 2006 Will Help Increase DC Savings
  • Contributions to 401(k) accounts can grow based on inflation index each year. Higher contribution limits made permanent.
  • Auto-enrollment is legal in all 50 states. Estimate increase in participation from 66% to ~90%.
  • Investment default options favor lifecycle funds vs. cash
    • Expect a marked decline in money market funds and stable value to a lesser degree as default options.
  • Automatic deferrals likely to start at 3% with auto-escalation of 1% for 3 years for plans to escape non-discrimination testing.
  • PPA allows for greater level of advice in DC plans through managed accounts and one-on-one counseling.
  • IRA plans can be combined with other IRAs, DB cash value plans, profit sharing and IRAs passed on to heirs.

5

slide7
The Median American Family Is In A Net Financial Deficit. The Average Baby Boomer Fares Better Largely Due To House Appreciation

Financial Position For The Median American Family – 2004 ($ ‘000)

Financial Position For The Average Baby Boomer – 2004 ($ ‘000)

Source: Survey of Consumer Finances 2004, Federal Reserve

Source: Cerulli Associates – Advisor Metrics 2006

6

just 1 of retiree households are hnw 2 5mm fincl assets but these households control 4 7t in assets
Just 1% Of Retiree Households Are HNW (>$2.5MM Fincl Assets), But These Households Control $4.7T In Assets

Retiree Asset Segmentation

2005

2020

NotHNW

NotHNW

HNW

HNW

Total = $12,344 Billion

Total = $35,419 Billion

Most Wealth Is Concentrated In A Small Percentage Of Households. Baby Boomers Are Generally Not Well-Positioned For Retirement.

7

slide9
Nearly 2/3 Of 401(k) Assets Are Held By Participants In Their Peak Earning Years (40-59), But 70% of Balances Are <$50,000
  • 2005 balances: average = $58,328; participants in their 60s = $180,988

401(k) Assets by Age Group2005

401(k) Balances by Size of Account 2005

<29

>$100,000

>65

30 to 39

60 to 64

<$10,000

$50,000 to $100,000

40 to 49

50 to 59

$10,000 to $49,999

Source: Cerulli Associates, Retirement Markets 2006

Source: Cerulli Associates, Retirement Markets 2006

Here Lie The Seeds Of A Retirement Crisis For Workers Who Don’t Adequately Plan For Retirement And Do Not Understand The Risks Of Outliving Assets

8

slide10
* Maximum SS: $25,392

Average SS: $12,528

Social Security & Pensions Generate 58% of Retirement Income. With DB Declining, Individuals Must Rely on Other Income Sources

Private Active DB Participant as % of Private-Sector Workers 2005

Sources of Retirement Income Retirees vs Pre-Retirees - 2005

Aggregate Retiree Income By Source – 2004

Other (incl. Public Assistance)

22.1%

17.7%

Asset Income(incl DC, IRA)

Social Security *

Earnings

Total Private Sector 101.4mm 113.7mm

Workers

DB Pensions

Source: Cerulli Assoc, Retirement Markets 2006

Source: LIMRA – Retirement Planning 2006

Source: Cerulli Assoc, Retirement Markets 2006

New Retirement Income Products and Decumulation Services Will Take the Place of Traditional Pensions

9

slide11
For Many People, Retirement Planning Consists Of Estimating Income & Expenses. Only 22% Of Pre-Retirees Surveyed Created An Income Plan

Retirement Planning Activities

Sources Consulted For Retirement Planning – 2005

=

Source: LIMRA – Retirement Planning 2006

Source: LIMRA – Retirement Planning 2006

Boomers who sought professional assistance and developed a retirement plan reported that they had saved twice as much ($1.8mm vs. $950,000) as the group who did not seek professional advice. LIMRA / Ameriprise

10

slide12
Retirement Planning Should Address Risks Facing Retirees, But There Is an Advice Gap With Respect to Solutions

Retirement Risks

Advice Gap

  • Rising health care costs
  • Longevity – outliving assets
  • Inflation
  • Long-term care
  • Asset allocation
  • Asset withdrawal rate

Source: Fidelity – Adapting a Practice for Retirement Income Planning

Health care is the second largest expense in retirement (following housing) and is perhaps the biggest risk to the success of a retirement income plan. Fidelity

11

slide13
Firms Who Have Expertise in the Broader Aspects of Retirement Will Be Able To Differentiate Themselves

Health care is the second largest expense in retirement (following housing) and is perhaps the biggest risk to the success of a retirement income plan. Fidelity

Differentiating Advisor Expertise

  • Critical illness insurance
  • Long-term care insurance
  • Longevity insurance
  • Reverse mortgages
  • Asset drawdown strategies
  • Knowledge of Medicare, Social Security, Medigap plans
  • Prescription drug plans
  • Tax implications associated with asset withdrawal
  • Income strategies
  • Estate planning

The advisor’s role will become more akin to an HR benefits specialist where the advisor helps retirees administer their retirement.

12

there are a number of ways to participate in the retirement market opportunity
There Are A Number Of Ways To Participate In The Retirement Market Opportunity
  • Recordkeeper
  • Technology firm outsourcer

Service Provider

Product Provider

Asset Gatherer / Financial Advisor

  • Asset management
  • Insurance
  • Income products
  • Retail orientation
  • Advice
  • Attract and grow assets – DB, DC, IRA
  • Scale / efficiencies
  • Penetrate retail and institutional channels
  • Best of breed
  • Rollovers
  • Complete product & service array
  • End-to-end solutions

13

slide16
In DC Administration, Opportunities Are Shrinking As Consolidation Continues, Similar To Global Custody
  • Aside from the big 4, asset managers have exited recordkeeping to focus on being product suppliers
  • Only 2 banks and 4 insurers are in the top-tier

Assets Under Administration ($ Trillions)

Top DC Recordkeepers – 2006

DC

Global Custody

$3.1

$8.7

$2.3

Top 50

Top 25

Top 10

Top 5

Source: Pensions & Investments.

14

slide17
Technology-Oriented Processors Are Gaining Market Position by Providing Outsourcing Capabilities To DC Recordkeepers

Full Outsourcing

Segment Rationalization($ Millions)

American Funds FASCore

Bank of America ADP/Aegon

Mercantile Bank BISYS

Morgan Stanley ADP/Fidelity

PaineWebber MFS

Fifth Third Bank FASCore

GE BISYS

ING DST

Federated FASCore

Am Express FASCore ($5-$50)

Merrill Lynch BISYS (<$3)

Prudential BISYS (<$3)

TR Price Trustar (sm plans)

US Bank BISYS (sm plans)

Delaware BISYS (sm plans)

Schwab Local TPA’s (<$20)

AIM DAC and CPI

Franklin Res FASCore

Source: 401(k) Exchange

15

slide18
For Product Providers, It’s Still Early. Focus Will Shift From Accumulation To Distribution & Towards Guaranteed Income

Guaranteed Income

Achieved Through

Investment Products

Insurance Products

Processes

  • Principal protection
  • TIPs
  • Annuities
  • Stable value
  • Systematic Withdrawal Income Programs (SWIPs)

16

slide19
For Asset Gatherers, The IRA Market Is Underpenetrated: The Top 5 Firms Capture 40% Of Rollover Dollars; The Top 10 – 55%

Market Share of Firms Receiving Rollover Dollars

Job Changers

Retirees

Fidelity

Fidelity

MerrillLynch

All Others

All Others

Wachovia

Vanguard

MerrillLynch

Charles Schwab

Ameriprise

MorganStanley

Prudential /CIGNA

CitiStreet

RaymondJames

Edward Jones

Edward Jones

Charles Schwab

CitiStreet

Wells Fargo

Ameriprise

Wachovia

Source: LIMRA Staying in the Game: Retaining Rollover Assets, August 2006. Based on respondents with corporate DC plans who (A) rolled their money to IRAs or took lump sum cash distributions and saved some or all of the money and (B) identified the firm receiving the plan assets.

17

a handful of firms will provide end to end retirement solutions driven by advice
A Handful Of Firms Will Provide End-to-End Retirement Solutions, Driven By Advice
  • Products
  • Lifecycle Funds
  • Principal Protection
  • Annuities
  • Reverse Mortgages
  • LT Care Insurance
  • Trust
  • Process
  • Investment strategy
  • Asset drawdown
  • Budget
  • Income distribution
  • Income mgmt accounts
  • Risk mgmt

Advice

  • Investments
  • Health Care
  • Insurance
  • Estate Planning

18

slide21
For Financial Advisors, Client Wealth Tiers Will Drive Retirement Strategies, Products And Advice Delivery

Source: Tower Group and Merrill Lynch

19

retirement is shifting from institutional to individual responsibility
Retirement Is Shifting From Institutional To Individual Responsibility
  • A) The individual is the ultimate client, so products need to be:
    • Easy for an advisor to explain
    • Easy for the individual to understand and use
    • Best in class

B) People will need advice on assets, income, health care, insurance

  • Client wealth tier will determine product and advice offering.
  • Differentiating your firm is crucial; e.g.,
    • Full product and service range
    • Benefits expertise
    • Retirement services specialist
  • Product providers need to maximize distribution
    • Registered Investment Advisors (RIAs), Financial Advisors (FAs)
    • Platforms: DC, annuities, DB; or separate accounts, IRAs, annuities
    • Distribution alliances
  • Service providers need to attract, grow and retain assets
  • Distributors should focus on becoming primary advisor; asset consolidator
  • Advisors need to acquire expertise in all aspects of retirement.

20

bear in mind
Bear in Mind

1. People are more apt to plan a vacation than their retirement.

2. The mass market / mass affluent are known for spending – not saving.

3. Most people just want advisors to tell them what they should do.

4. Most people will need to create their own retirement income.

5. Products on autopilot work well.

6. It’s a new balancing act – assets, income, protection, expenses.

7. The first 4 years of retirement are crucial to a portfolio’s success.

8. The employer is where individuals are first exposed to retirement products.

9. Health care costs will likely be a bigger issue for retirees.

10. There’s still time. We are only at the beginning of the retirement income opportunity which peaks in 2026.

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