Data & Research April 14, 2007

IMHO: “Self-Fulfilling″ Prophecies

The Employee Benefit Research Institute (EBRI) and Matthew Greenwald&Associates published the 17th Annual Retirement Confidence Index last week – and, for the very most part, it’s probably safe to say it didn’t tell us much we didn’t already know.
Reported by
More than half (52%) expect to be comfortable, another third categorize their post-retirement income status as “adequate,’ and 6% are looking forward to being “well-off’ – at least in the first five years after retirement. Just 10% say they will be “struggling.’
While they are apparently less confident than they once were in terms of a traditional pension benefit, they remain largely complacent about their overall prospects for a comfortable retirement – more than a quarter are VERY confident, and another 43% are somewhat confident, in fact. Still, only 18% are much less confident about receiving that traditional pension. (Oddly, and perhaps proving that confidence is a relative term, “only’ 29% of those who do not expect to receive a pension are less confident. Can one truly be less confident of receiving something that you don’t expect to receive?) And while 62% say that they expect to see that traditional pension someday, only 41% say they are currently covered by such a program (see .
The survey, well-regarded for its breadth and depth of analysis, also revealed that almost half of the workers who are saving for retirement (bear in mind that only about 60% are at present) have accumulated…less than $25,000. Seven in 10 of these workers have less than $10,000 saved (including more than a quarter of those older than 55). They also continue to misjudge the age at which they will be eligible for full Social Security benefits (it’s no longer 65, by the way), appear to overestimate the existence of long-term health coverage (they think they have it, though only 10% of the population does), and – at least based on current trends – seem to be more optimistic about the availability of employer-provided health care in retirement.
“Agree’ Mien?
But what I found most intriguing about the RCS results from the perspective of advisers – was how survey participants responded to the notion of advice. There have been any number of surveys done in recent months about participants and the need for help in making investment decisions, and they consistently indicate a strong desire on the part of participants for help. Setting aside for a minute the fact that many of those surveys are underwritten by firms interested in providing that help, I’ve heard that exact message from both plan sponsors and advisers in the field (although, more recently, the call hasn’t been for help in making the decision, it has been an interest in having someone just take care of it).
However, in the RCS, fewer than two in 10 workers said they would be very likely to take advantage of investment advice at a modest cost (“modest cost’ was not defined for them), and only about a third (35%) said they would be somewhat likely to do so (the rest broke nearly evenly between would not likely, and would definitely not take advantage). However, advisers might take some comfort in knowing that those who had used an adviser previously, those who were under the age of 55, and those with higher household incomes were more favorably disposed toward the service.
But even among those interested in investment advice, only about one in five (21%) said they would implement all of the recommendations – if they trusted the adviser. A full 11% said they wouldn’t implement any of the recommendations, and two-thirds said they would implement only the recommendations that were in line with their own thinking.
All of this would, unfortunately, seem to portend a rough road ahead for advisers who are trying to get across the importance of retirement savings. After all, if people are feeling this “confident’ about their prospects, no wonder the nation’s savings rate continues to languish. And if participants are only interested in recommendations that match their own thinking – and their thinking is grounded in these feelings of relative optimism – how are they going to be able to ready themselves for what may be a very rough future reality? Ultimately, of course, it will take more than confidence to ensure retirement security: It will take awareness, planning, and action. The RCS should, IMHO, be a wake-up call for us all.
Note: The good news in the RCS is that workers who are saving for retirement, who have taken the time to do a retirement needs calculation (and who have higher incomes) – tend to be more confident than others about their prospects.
In Practice April 12, 2007

Process Required for Success in Retirement Income

Adopting a process-centric approach to retirement income management will provide better service to clients and will lead to faster asset growth for the adviser, along with higher productivity and greater client retention.
Reported by

Using a process approach, instead of a product or planning approach, will optimize sustainable retirement income programs for individuals, says the white paper, “A Process-Centered Approach to Retirement Income–Best Practices for Institutions and Advisors,” released this week by FundQuest, a provider of customized turnkey managed investment account solutions to financial institutions. The process approach suggested in the paper includes a complete cycle of analysis, planning, implementation, ongoing monitoring, and adjustment.

Currently, few financial services firms have invested in comprehensive retirement income platforms, the paper says. Advisers need a solution that allows them to answer the following questions for each client:

  • Will I have enough to retire?
  • Am I invested appropriately?
  • What is the best way to generate the income I need?
  • Will I have to work in retirement to support my lifestyle?
  • What are the trade-offs and key drivers?

The paper asserts that “good planning by itself or solutions driven by one-time single product sales are inherently insufficient to address the complexity of an individual client’s evolving retirement income needs.” Therefore, product-centric or planning-centric solutions are not a sustainable approach for advisers looking for a retirement-income management tool because they make it hard to reconsider ongoing risks such as longevity, health care costs, market risks, functional inflation, withdrawal rate and insufficient savings, impact of unplanned events, and bequest planning. Using a process-centered approach lets advisers cope with unexpected events and risks on a continuous basis. For example, ongoing monitoring processes help ensure that plan adjustments, often driven by major life changes and investment performance, are implemented on a timely basis, FundQuest says.

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According to Bob Del Col, Chairman of FundQuest, “Financial institutions recognize the significant value that advisers and their clients can derive from a process that tightly integrates planning, implementation, and ongoing monitoring capabilities. Institutions also recognize that this integrated approach has significant advantages versus standalone retirement planning tools.”

Most advisers use some type of formalized retirement income software program to work with clients, the paper says. However, it continues, many of these products are “home grown,” solutions made by the adviser using components of the accumulation-based programs available in the marketplace, and advisers believe that their productivity in the retirement income market would improve if they had better retirement-specific software, tools for educating consumers, and more training. Rounding out the top five things advisers said would help their productivity were better lead generation and models or calculators to use with clients.

“Advisers and financial institutions have told us that one-time-single-product sales, and set-it-and-forget-it solutions are inadequate. With a comprehensive process, supported by automation and appropriate products, advisors can efficiently create and maintain individualized retirement income programs,” said Lisa Burns, co-author and FundQuest Retirement Product Manager.

Therefore, FundQuest says that the best way to address the needs of Baby Boomers in retirement is to develop a process-centric solution with three steps: plan, implement, and monitor. The paper details the practical actionable steps advisers can employ to address each investor’s specific needs in retirement and along each step of the process. The benefits of using a process-centered approach include, according to FundQuest: the ability to retain clients before and during retirement, asset consolidation, increased productivity, and comprehensive documentation of client data, goals and assumptions.

The paper says that one of the reasons this model works so well is that the adviser and the investor work closely together during the planning and analysis phase. With that close interaction with the adviser, clients are more likely to both proceed with the resulting investment recommendation and to consolidate their assets at the guiding institution because they feel they have been involved in the process of creating a unique solution for their situation.

 

The white paper is available at: www.fundquest.com/press-resea.htm

Del Col recently presented excerpts from the paper at the Retirement Income Industry Association’s annual conference (See Tackling the Retirement Income Arena Requires New Processes)

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