Client Service October 2, 2019

A Seamless Advisory Experience

The typical investor has five to six accounts, multiple products and custodians, and two or three advisers managing their assets.

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An extensive new white paper published in collaboration by the Insured Retirement Institute (IRI) and Allianz Life Financial Services offers advisers a fresh take on the evolving competitive and client service landscape they face.

The paper’s authors include Jack Sharry, executive vice president and chief marketing officer of LifeYield; Wayne Chopus, president and CEO of the IRI; and Corey Walther, president, Allianz Life Financial Services. Looking back at the way advisers’ practices have evolved over the years, the trio suggests there has been a lot of value delivered to clients. But at the same time, clear issues remain, and the retirement specialist advisory industry must evolve to remain relevant.

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“By diversifying in an ad hoc way, sometimes based upon buying what recently worked and selling what didn’t, investors may have found themselves unintentionally doing three things,” the paper suggests. First, over the years, investors have underperformed the markets. Second, they have taken on unintended risk, and finally, they have paid unnecessary taxes.

The report indicates investors tend to chase performance, and as a result, fall short of their objectives.

“In a quest for diversification, investor households may have also opened multiple taxable and tax-advantaged accounts over time, with products often purchased from different advisers with virtually no coordination,” the paper warns. “This can result in them having a risk profile that could be inconsistent with their objectives and may also lead to them paying unnecessary taxes.”

According to Chopus, Sharry and Walther, wealth advisers realize clients expect more than just strong investment performance, but they struggle to communicate the value of their offerings and services.

“The answer is not simply lowering fees, but rather a combination of increasing transparency and predictability when it comes to pricing models, and equipping advisers with ways to communicate value beyond investment returns,” the paper suggests. “Industry leaders are working on communicating value, aggregating data, and combining capabilities to create better outcomes from a cost, risk and tax standpoint.”

The paper here cites data from Morningstar to show that an optimal asset location/organization strategy—using “a risk-smart, tax-smart strategy,” from accumulation through withdrawals—can add 1.83% per year in incremental after-tax returns and income. Using a $1 million portfolio as an example, optimized strategies resulted in an additional $156,000 for the client over 10 years.

Given the roles of the IRI and Allianz in advocating for greater use of annuities and guaranteed lifetime income products, it’s no surprise the paper suggests clients and advisers are recognizing the need to create a comprehensive household-level plan with a holistic approach to addressing risks.

“Given the complexity of managing at the household level, advisers are moving to a wealth management approach that leverages the modern design of investment and insurance solutions, at both the product and platform levels,” the paper suggests. “Combining the adviser’s knowledge with the institutional scale and the risk management acumen of an insurance company, this modern approach facilitates deeper client relationships, helps differentiate advisers from commoditized investment planning, and can add more consistent revenue.”

According to the white paper, demand for insured-based solutions has grown as more traditional sources of protection and lifetime income (such as pension plans) have disappeared, and more and more people are nearing or entering retirement.

“Product design options have greatly improved—including fee-based product options, lower cost structures, flexible designs, and modern withdrawal benefits,” the paper says. “These advancements have become integral to addressing risks costs, and taxes within a retirement planning ecosystem. Annuities need no longer be viewed as an independent transaction; they can now be managed, billed, and reported together with other assets in the portfolio to facilitate a goals-based, relationship-driven practice model.”

The paper points out that recent developments in the income insurance space are generally unknown, or little understood, to a large segment of financial advisers.

“The future of advice lies in creating value by leveraging people and technology to coordinate and optimize the products, accounts, and holdings that make up a household portfolio—to deal with critical life moments and the evolving complexity of a client’s financial life—for the end objective of improving outcomes,” the paper continues. “Wealth managers, annuity companies, asset managers, retirement plan sponsors, and technology providers are working together to drive the evolution of both approaches for comprehensive solutions.”

As Sharry, Chopus and Walther explain, platform solutions already available today are designed to help advisers optimize, aggregate, and quantify the financial benefit of managing multiple household accounts and products in a risk-smart and tax-smart way.

“This approach requires operational infrastructure that connects and integrates multiple capabilities to help advisers help investors improve outcomes,” the paper says.

Complementing the platform solutions, technology-enabled client solutions are emerging that combine a simplified planning approach with shared control of investment decisions and optimized products and accounts. Using easy-to-understand software tools, advisers can customize a potential solution for investors to chart their course toward improved outcomes, the paper says.

Sharry, Chopus and Walther conclude their paper with some key recommendations advisers should consider in their efforts to build more seamless client experiences.

“Evolve your practice with a focus on goals-based, household-level solutions,” the paper suggests. “Help facilitate greater confidence through holistic wealth management that may deepen client relationships and set you apart from commoditized alternatives. Leverage institutional scale to integrate risk management capabilities in your practice. Yes, you can manage some risk on your own, but outsourcing to gain scale and efficiencies will allow you to focus on other components of the portfolio. Take another look at modern insurance products available on the market today. Annuities have come a long way with fee-based designs, competitive costs structures, greater flexibility, contemporary withdrawal benefits, and income guarantees that may allow for greater risk tolerance in other parts of the client’s portfolio.”

Data & Research October 2, 2019

Helping People Work Past Age 65

While 75% of employers consider their companies to be “aging friendly,” only 54% of workers think their companies have adopted such policies.

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Transamerica Center for Retirement Studies’ (TCRS) 19th annual retirement survey, “Employers: The Retirement Security Challenge,” focuses on the need for workers with greater longevity expectations to remain in the workforce longer than previous generations.

“We are looking at this issue in multiple ways,”  Catherine Collinson, CEO and president of TCRS and the Transamerica Institute, tells PLANADVISER. “As people live longer, we need to rethink the amount of time spent in the workforce and in retirement. Mathematically speaking, it is challenging for workers to spend 40 years in the workforce and save enough to last a retirement of 20, 30—or even 40 more years.”

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So many workers haven’t saved enough to fully retire at age 65, Collinson continues. “The natural solution is to extend their working lives, so we have made time-in-workforce a broader emphasis of our survey work. That is a very important part of the financial equation.”

The survey found that not all employers think their workforce will be able to achieve a financially secure retirement. Seventy-one percent are confident in this scenario, including 17% that are very confident and 54% that are somewhat confident. In contrast, 64% of workers are confident they will be able to fully retire with a lifestyle they consider comfortable, including 18% who are very confident and 46% who are somewhat confident. The median age workers expect to live to is 90.

While 75% of employers consider their companies to be “aging friendly,” for example by offering flexible work arrangements and training for workers of all ages to be successful, only 54% of workers think their companies have adopted these policies.

Collinson says that a survey of retirees that Transamerica conducted late last year found that more than half retired earlier than they had planned to. “Diversity in the workforce, including age diversity, is extremely important,” Collinson maintains. “This is a major paradigm shift for employers. They will need to change their thinking about when and how people retire.” She says there is actually a need for companies to retain their Baby Boomer workers because there are fewer workers in the workforce to replace them.

Collinson says employers should consider offering Boomers a phased retirement starting with part-time or seasonal work. The survey found that only 26% of employers have adopted a formal diversity and inclusion policy statement that includes age among other commonly included demographic characteristics.

“A multigenerational workforce is something people have begun talking about over the past 10 years,” Collinson says. “I have had the privilege to work with multigenerational teams over the course of my career, and the level of collaboration is inspiring and rewarding. There is a movement afoot to raise awareness of the need for this diversity.”

In fact, the survey found that 69% of employers say many employees at their company expect to work past age 65 or to not retire at all. Among workers, 53% plan to work past age 65 or to never retire.

Seventy-seven percent of employers say their company is supportive of employees working past age 65, but only 77% of workers believe this to be the case.

Twenty-seven percent of workers envision working fewer hours, and 16%, in a different capacity. Only 22% plan to immediately stop working and fully retire.

There is work to be done in this area among employers, Collinson says, as only 38% of employers offer flexible work schedules, only 30% permit workers to move from full-time to part-time work, and only 23% encourage their employees to participate in succession planning, training and mentoring.  Seventy-five percent of employers do not offer a formal phased retirement program for workers who want to transition into retirement.

Employers think that age 70 is too old to work, while workers say it is age 75.

Collinson says addressing the needs of older workers should include retirement income solutions. “It would be terrific if plan sponsors were comfortable with offering this in various forms, including guaranteed income for life, but in the absence of this, simply offering education and planning resources on retirement income can go a long way towards solving the problem,” she says.

The State of 401(k) Plans

The survey also explored the state of 401(k) plans among employers. Seventy-seven percent of employers think offering a 401(k) or similar plan is important for attracting and retaining employees, but only 65% offer such a plan. Among those offering a plan, the reasons they give are the following: helping employees prepare for retirement (59%), retaining existing employees (59%), offering a competitive benefits package (55%) and increasing employee job satisfaction (54%).

Sixty-five percent of employers work with a retirement plan adviser. Among those who are not offering a retirement plan, only 31% say they are likely to do so in the next two years. Among those offering a plan, only 46% extend it to part-time employees. Fifty percent of workers say their primary source of retirement income will come from self-funded savings such as a 401(k). Among those who are offered a plan, 77% participate in it. Eighty-eight percent of employers offer a company match.

Only 21% of sponsors in the survey have adopted automatic enrollment, with the median default rate being 5% of pay. Among those with automatic enrollment, 51% also have automatic escalation. Eighty-eight percent of workers say automatic enrollment is appealing.

Eighty-three percent of employers offer a target-date fund, a target-risk fund or a managed account. Twenty-eight percent of workers have taken out a loan from their 401(k) or similar plan. Among those who have, the most common reason is to pay off debt (34%), followed by to deal with a financial emergency (23%) or unplanned major expense such as a home or car repair (20%).

Workers’ estimated median total household retirement savings is $50,000.

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