BOSTON-Asset managers will have to adapt their techniques and operations beyond their current business models to survive the shifting demands in the retirement product marketplace.
That was the resounding message at Money Management Institute's 2008 annual conference here last week, themed "Innovations in the Managed Solutions Industry."
As 77 million Baby Boomers start to retire, they will seek retirement products suited to their various lifestyles.
"The products that dominated the past will be replaced by newer, nimbler alternatives," attested Bruce Harrington, managing director of Cogent Research. Harrington and others touted exchange-traded funds, separately managed accounts and unified managed accounts, of course, but they also said that the income-producing, inflation-protected and laddered products that have been touted as the exotic far-reaching solutions completing the retirement income challenge, don't go far enough.
The money management industry will devise many more solutions that have yet to be imagined, Harrington said.
Victoria Klein, managing director and head of U.S. iShares sales for Barclays Global Investors Services, said ETFs are allowing individual investors access to esoteric market asset classes that were previously available only to institutions.
"There is nothing else out there that allows an investor to express their views in real time," Klein said.
The increasing complexity of these new products will demand that retail-oriented asset manages educate financial advisers on their appropriate use, she said.
"Our clients are going to need more solutions in order to meet their objectives," agreed Roger Paradiso, president and chief investment officer at Legg Mason Private Portfolio Group. "The whole idea of a UMA is to bring those products into one vehicle. Good advice is going to be needed because there are more products out there."
Nonetheless, Malik Salwar, senior vice president for The Permal Group, countered that the job of product providers is to represent high-quality products. Rather than trying to offer every product and fad, providers should select the best and become experts on them, creating a core fund that is more global in nature, he said.
"A good restaurant doesn't have a 10-page menu," Salwar said, adding that a portfolio manager, like a professional chef, should specialize in a few products and oversee them effortlessly.
"When you come to our firm, you buy one ticket and instantly have more exposure to high-quality managers," Salwar said.
Social Security payments currently account for 85% of the total retirement income of the bottom third of all Americans, said Alicia Munnell, director of the Center for Retirement Research at Boston College. Less than 50% of the workforce has a defined benefit or defined contribution plan, she said.
Rising healthcare premiums will take a bigger chunk out of retirees' monthly income, and Americans will need good financial advice to ensure they have money in retirement, Munnell said.
Healthcare made up a mere 7% of retirement costs in 1980. Just over a quarter of a century later, in 2007, that had climbed to 29% in 2007, and it's anticipated that healthcare costs will eat into about half, or 46%, of retirement costs, by 2030, she said.
If the demise of Social Security isn't already a given for most Americans, accelerating medical advances will ensure its failure, Munnell said.
"We have promised more benefits than we have the revenue for," Munnell said.
"It's crazy for us to think that every American should be an investment expert," she said.
Automatic enrollment has been a great start, but auto enroll programs typically invest 3% of a worker's salary into a very conservative investment like a money market fund. Five years later, employees are inevitably in the same plan, she said.
"The individual is supremely ill-equipped" to handle such long-term finances, Munnell said, noting that the average American does not contribute the maximum to their 401(k) plan, does not diversify their portfolio, does not change the balance of stocks versus bonds as they get older, and doesn't even roll over their 401(k) when they switch jobs. On top of that, those who are offered company stock often can't resist the temptation to load up on it.
"Outside of 401(k)s, Americans are saving virtually nothing," Munnell said. "People do not save on their own, except through their employer's plan or through real estate," she said. "People's homes are going to become an increasingly important asset as they get older. Current reverse mortgages are clunky, but they will become an increasingly important part of retirement income planning."
People also have a huge misconception about when they will retire. The expected retirement age is 65; the actual retirement age is 62, she said.
"There is a huge disconnect when it comes to retirement. People will retire for the flimsiest of reasons," Munnell said, including having a new, younger boss they don't like. Some people will come back from a bad business trip and decide that they're done with it, or they will hurt their ankle and have to miss work for a few weeks and decide that staying at home isn't so bad, she said.
Another huge misconception, Munnell said, is that companies will want to hire older workers.
"Employers don't like wrinkles or grey hair," she said. "They would just as soon not hire older people."
Older workers are typically more expensive, and they have much higher healthcare costs, she said. However, what such employers often overlook and shortchange themselves on is that seasoned pros often know the ropes and understand things better, and they're good with customers-particularly other older customers.
"But are they worth it? Why hire someone if they're going to retire in a few years?" Munnell said.
That's the question both employers and workers of every age are asking themselves.
"Retirement income is contracting, retirement needs are expanding, and a lot of people are at risk of outliving their savings," she said. The unfortunate conclusion most people are arriving at is "working longer and saving more."
But that is just not feasible for everyone.
The decumulation phase of 77 million Boomers looms as an impending disaster, the director of the Center for Retirement Research continued. Social Security wasn't designed to handle such a huge number of retirees, she stressed, and replacement rates for people under 55 are going to go down. The system will need to be changed in order to survive.
"We can either raise taxes to keep the promises of Social Security or keep taxes steady and cut benefits," Munnell said. "Raising the age at which people qualify for Social Security to 70 would solve the financial problem, but it would create a lot of suffering. A lot of people aren't able to work when they hit their 60s. Raising the retirement age could be the answer, but we will have to make some sort of provision for people who can't work."
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