Traditional Retirement Products Being 'Phased' Out

New retirement income products must emerge to fit new retirement models.

So said Stephen Mitchell, director of Investor Education and Planning Tools at Merrill Lynch, at the Managing Retirement Income conference in Boston this week. Unfortunately, advisers and those in the financial services industry are not focused on the new model of retirement. In order to succeed in serving the Baby Boomers, advisers must understand the challenges of the new retirement model and design products for that space, Mitchell asserted.

In the future, “we will see advisers sitting across from clients asking if they know what job they’d like to have after retirement,” Mitchell said. Studies have shown that people want to “phase” gradually into retirement (see Workers Plan to “Downshift” Into Retirement), and are interested in pursuing new jobs and starting their own companies (see Workplace Pressures Creating New Generation of Entrepreneurship). In fact, Mitchell said, many of today’s retirees are working, on average about 20 hours per week.

New Models

“The old models need to morph to reflect the new retirement,” Mitchell said. There is an opportunity for advisers in this area, but even if people look to professionals for help, Mitchell said, the consumer has control over who he chooses to work with, so the adviser needs to be able to address the customers’ needs.

Customers should be viewed as consumers, not investors, according to Zvi Bodie, a professor at the Boston University School of Management. Consumers do not want to become educated about investing; they just want security in their old age. Brodie claims that rather than learning about something and making a decision, they just want to have someone tell them what product is best. “If these products are going to be sold,” Bodie said, “it should be like trying to sell me a home video system. I don’t want to learn, I just want a product that works.” From a consumer standpoint, there isn’t much better than a DB (defined benefit) pension plan you don’t have to think about, he said.

Industry Myopia

“Because we, in this industry, find this stuff fascinating,’ he said, “we think other people do too – they don’t.” Therefore, it is important to understand the market, which is people who essentially want to maintain their standard of living in retirement, he commented.

Key considerations will include understanding the target audience and what their expected patterns of income will be. The challenges in developing new products are that any lifetime income protection is very interest-rate sensitive, Mitchell said, and the high anti-selection bias makes insurance very inefficient.

Bodie agreed that insurance is inefficient; in principle, he said, insurance should be much cheaper than investing because while insurance pays $1 in certain circumstances, an investment pays $1 all the time.

“Can we make retirement cheaper?” he asked. “Not only can we, we have to,” he answered. There have been huge advances in modern financial technology. The financial services industry can use this technology to create customized products; there should be more of this being done for consumers, instead of just offering packaged products.