Products July 3, 2012

Default Investment Option Addresses Longevity Risk

United Technologies Corporation (UTC) is helping participants tackle longevity risk with a new default investment option.   
Reported by

UTC recently launched Lifetime Income Strategy, built to combine the simplicity of a target-date fund (TDF) with the security of lifetime income. This default investment option in the company’s defined contribution (DC) plan is based on a design by AllianceBernstein.

The Lifetime Income Strategy is an age-based default investment option through which each DC plan participant has access to a target-date portfolio built specifically for them.

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PLANADVISER spoke with Mark Fortier, head of product and partner strategy at AllianceBernstein Defined Contribution Investments, about Lifetime Income Strategy and the importance of dealing with longevity risk.

PLANADVISER: How does Lifetime Income Strategy work?   

Fortier: Think of this as sort of the next evolution TDF. It has the same simplicity as a traditional TDF but in this case, the big benefit is it eliminates the biggest risk participants have, which is outliving their assets. Starting around age 48, it starts to acquire secure lifetime income for the participant, [and] it slowly increases the level of protection from zero at age 48 to 100% at age 60. So at 60, 100% of your assets are protected inside the lifetime income strategy. Lifetime income strategy looks like any other investment option to the participant. The big difference here is it will be the default for UTC. [The company’s default] used to be a traditional TDF.

PA: Why are products like Lifetime Income Strategy important for today’s workers?  

Fortier: The risk that sponsors are seeking to solve … is the longevity risk. The issue that … solutions are trying to solve is planning and savings. So in other words, the certainty of income at retirement allows people to plan for retirement. How do you ask a participant to prepare for retirement when you don’t know their planning horizon? So the value is it eliminates the risk of outliving your assets, [and] it also gets them to save prior to retirement.

PA:Do you see an industry trend to address longevity risk?  

Fortier: Risk has certainly taken a new front page for everybody. This issue is finally just coming to the forefront.

PA: Do participants see longevity as a risk?  

Fortier: [Many people] don’t see longevity protection as something important because [they] don’t fear living too long. Would you consider living too long a bad thing? No. There’s the problem. To date, the reason you buy insurance is to protect yourself against bad things. But living too long, [people think] that’s not a problem … but it is. It’s an interesting problem: How do I protect myself from living too long?   

PA: What other issues can a product like Lifetime Income Strategy address? 

Fortier: Not only does it help with retirement confidence, but it really helps [companies] understand when their workforce [will] retire. The more I am empowered to have retirement confidence as an employee, the more productive I am, the more I can plan with my employer. Now my employer can arguably go out and seek the next generation of employees. For large corporations, in a world post-DB, they’re all starting to realize the challenge of managing the workforce that doesn’t know how and when they’ll retire.

The Markets July 2, 2012

Investor Sentiment Shows Slight 2Q Dip

Investor confidence softened somewhat in the second quarter, according to the Investor Sentiment Index, released Monday by John Hancock Financial Services.  
Reported by

The John Hancock Investor Sentiment Index remains in positive territory. Slight declines, to +19, from +21 in the first quarter, are because of less-optimistic views on equities. More investors are concerned about Eurozone debt and less worried about unrest in the Middle East.    

The Index shows that investors overall feel almost the same about investing this year compared with last year. In the same quarter a year earlier, the Index score was +18.

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Investing for retirement remains popular. Nearly eight in ten investors (78%) feel that now is a good time to be investing in 401(k) plans, and three-quarters (74%) have similar feelings about individual retirement accounts (IRAs). Investors felt about the same a year ago, with 80% saying the second quarter of 2011 was a good time to be investing in 401(k) plans, while 79% said it was a good time for IRA investing.

Investors’ views on most types of investments remain unchanged in the second quarter from the first. Attitudes toward balanced mutual funds were similar to the previous quarter, with 52% now saying that it is a good time to be investing in balanced mutual funds, a slight dip from 54% in the first quarter.

Blue-chip stocks will perform the best over the next six months of this year, said nearly 20% of investors. Small-cap stocks (picked by 16% of investors to perform best) were next, followed by emerging-market securities (14%). Only 4% of those surveyed believe international equities will perform well, with even fewer (2%) optimistic about government bonds. Investors believe that energy, technology and health care companies will provide the best investment opportunities in the next six months. Investors are more inclined than in the previous quarter to cite health care as a leading sector (47% compared with 42% last quarter).

 

(Cont’d …)

Among the key findings of the index:

 

  • Investors believe they are in a better financial position today compared with two years ago (42%). Half (50%) believe that, in two years, they again will be in a better financial position. This is a significant decrease from 57% in the previous quarter and 58% in the same quarter a year earlier.
  • Investors mention the value of their investments decreasing and being able to save enough retirement as their biggest personal financial concerns. Investors are highly confident in their ability to attain many lifetime financial goals, with paying off a mortgage (94%) and maintaining a financially secure retirement (90%) topping the list.

The John Hancock Investor Sentiment Index, conducted quarterly, is a quarterly measure of investors’ views on a range of investment choices, life goals and economic outlook, as well as their confidence in these areas. The second-quarter survey was conducted online by Mathew Greenwald & Associates. A total of 1,011 investors with household incomes of at least $75,000 and assets of $100,000 were surveyed May 14 to May 25. To qualify, respondents were required to participate to some extent in household financial decision making.

 

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