In Practice May 14, 2008

Y Not?

Young adults remain an untapped market for financial advisers, says Mintel research firm.
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Despite warnings about future shortfalls in retirement savings, many young adults choose not to save for retirement. More than two-thirds (69%) of Generation Y workers who can participate in a tax-deferred 401(k) retirement savings plan are not doing so, according to results of a study from Mintel.

In the study, Mintel considered Generation Y to mean those born between 1977 and 1994 (aged 14 to 31). Generation Y comprises 21% of the U.S. population.

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“Today’s young adults will likely need to rely more on individual savings for retirement than their older counterparts,” said Susan Menke, Senior Analyst at Mintel. “But so far, they aren’t preparing to do so.”

Financial advisers could help Generation Y realize the importance of long-term savings. By encouraging young adults to make small monthly contributions to a retirement account, “advisers can help them build a nest egg slowly but surely,” Mintel said in a release.

“Plus, focusing on retirement gives advisers an avenue into Gen Y,’ Menke says. “From there, they can partner with young adults, helping them create a financial plan that gets them through expected and unexpected life events.”

Targeting Generation Y

Mintel found that teens and 20-somethings make up a sliver (5%) of financial advisers’ client base.

“Advisers still primarily target wealthier, older adults,’ explained Menke. “With less disposable income, Gen Y isn’t seen as a lucrative clientele. But financial advisers are missing the opportunity to catch young adults now and keep them as they grow older—and richer.”

In 2007, adults aged 30 and under received only 2% of investment direct mail offers tracked by Mintel Comperemedia, which tracks trends in direct marketing, the release said. In contrast, adults older than age 60 received 41%.

Some companies are making an effort to target Gen Y, according to Mintel Comperemedia. USAA promotes an IRA with no fees and a low minimum contribution to encourage younger adults to start saving so their money can grow over time. Bank of America targets tech-savvy youth by promoting an online integrated platform for its brokerage accounts and an automatic investment plan.


Data & Research May 14, 2008

Guaranteed Income Might Increase Total Retirement Income

Adding guaranteed income to a qualified default investment alternative (QDIA) can generate higher income levels in retirement, a study to be released Friday by Genworth Financial said.
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Conducted by Oliver Wyman in partnership with Mercer Retirement Consulting, Providing for Secure Retirements: Guaranteed Income as a Qualified Default Investment Alternative says that adding guaranteed lifetime income to a traditional target-date fund or balanced fund can increase a 401(k) participant’s starting retirement income by up to 53% and improve average retirement income by up to 30%.

Risk of Ruin

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As the risk of retirement responsibility has shifted from the employer to the employee, plan participants are now faced with the task of ensuring they do not run out of retirement savings, which Genworth calls the “risk of ruin,’ or, the risk of running out of money. Guaranteed income products are one way to protect against this risk, Genworth says.

The study shows that an individual who retires at age 65 and annually withdraws an inflation-adjusted 5% of his or her initial account balance at retirement from a traditional target-date fund stands a 75% chance of running out of money by age 95. (The probability of living to age 95 for an individual who is 65 is 19%. For those who live to be 85, the chance of running out of money is much lower, at 11%, according to the study.)

The guaranteed income strategies in the study were based on Genworth’s ClearCourse Annuitization Benefit, which provides a minimum guaranteed income, and the ClearCourse Withdrawal Benefit, which provides a minimum guaranteed withdrawal and access to the remaining account value at death.

Genworth says the research shows that guaranteed income products allow 401(k) participants to benefit from strong financial markets, while also offering protection against periods of poor market returns.

“The addition of guaranteed income to a QDIA offers plan sponsors the opportunity to provide their participants with the best attributes of a defined benefit plan in a defined contribution vehicle,“ said Fred Conley, President of Genworth’s Institutional Retirement Group. “This solution helps participants to get the best of all worlds – flexibility, growth potential and security – all within one investment choice.’

Choosing a Product

Conley pointed out that there is a good chance plan participants will need help converting assets accumulated into income during the distribution phase, and guaranteed income products will be a part of that.

The study says guaranteed income should be considered as part of a QDIA strategy if participants value:

  • increased security that retirement income will not be outlived
  • increased income without incurring a risk of ruin
  • protection against poorly performing financial markets
  • participation in strongly performing financial markets

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