In Practice May 16, 2008

Fiduciary Responsibility Is Most Important Plan Sponsor Issue

Fiduciary responsibility and fee transparency are at the forefront of important issues in the 401(k) market, an informal survey of retirement plan consultants says.
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The majority of 40 of the industry’s most influential retirement plan consultants surveyed at an April Charles Schwab conference reported that fiduciary responsibility is the most important issue for plan sponsors today, followed by fee transparency and plan costs ranking second and third in order of importance.

When asked what issues have increased in importance for plan sponsors in the past three to five years, the majority of consultants said that fee transparency is the area that has grown the most in importance for plan sponsors.

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The consultants said the results of 2008 presidential election should have little or no impact on 401(k)s, and in general, consultants are not overly concerned with the current economic environment relative to the future of the retirement industry, according to Charles Schwab. Consultants surveyed did, however, see target-date retirement funds and the effects of Baby Boomers withdrawing funds from their 401(k)s as potentially having a larger impact on the retirement industry in the next five years.

The consultants also said the number of plan sponsors interested in evaluating switching plan administrators seems to be on the rise over the last few years. They also see a growing trend of 401(k) plans moving from wirehouse advisers to registered investment advisers (RIAs).


The Markets May 16, 2008

Annuity Assets Expected To Increase

Annuity assets will grow to $2.9 trillion by 2012, fueled by demographic and product trends, a recent study by Cerulli Associates says.
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The predicted growth from the current level of $2.1 trillion signifies a compound annual growth rate of 7.9%. In particular, qualified variable annuities are considered by asset management and insurance companies as having very strong growth potential, mainly to provide a guaranteed lifetime income from a portion of rollover dollars, the research from Cerulli says.

While advisers are not necessarily on the bandwagon for annuities, the report suggests that they might be. According to data gathered by Cerulli, 38% of advisers always use variable annuities with living benefits to meet their clients’ needs, and 36% make occasional use of such investment vehicles.

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Cerulli found that advisers traditionally preferred using mutual funds to generate retirement income. However, the increased acceptance and demand for the guaranteed minimum withdrawal benefit (GMWB) “bodes well for the insurance industry as a whole,’ the report says. The enhancements in new GMWBs include lifetime guarantees, step-ups in payout amounts, deferral bonuses and other enhancements.

Cerulli also points to the numerous opportunities for asset managers to further penetrate the variable annuity industry, driven by an appetite for third-party subadvisory arrangements that enable insurers to offer greater depth and breadth of funds as well as the potential for stronger investment performance.

However, the report says insurers and asset managers do not agree on the future of specific funds styles. Asset managers are optimistic about the growth of global funds and indicate a high likelihood of developing these funds for their variable insurance clients, whereas insurers generally lacked interest in adding them to their platforms.

Despite the product trends, Cerulli says that successful retirement income model will be about more than these revamped and new tools: It will entail a holistic approach—which could be a new mindset for insurers, who have often treated annuities as stand-alone operations (see Annuities Need to Be Part of a Holistic Retirement Plan).

Cerulli Quantitative Update: Annuities and Insurance 2008 was based on surveys of asset managers, insurance companies, and financial advisers. The full report can be purchased here.

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