PALM BEACH, Fla. - Insurance companies and mutual fund firms are jumping on the bandwagon to provide guaranteed retirement income solutions, but experts say these types of investment options won't see wide adoption rates among the general public until they become a qualified default investment alternative (QDIA) in 401(k) plans.
"Guarantees resonate well with the general needs of consumers," said Rebecca Ades, vice president of institutional sales for corporate markets at AXA Equitable, at the 2008 SPARK Forum, held here earlier this month at The Breakers hotel.
"The future of the market is for these income guarantees to sit inside 401(k) plans. They can provide a guaranteed income stream on the back end and offer market volatility protection during accumulation as well."
As defined contribution plans continue to overtake pension plans as the main source of retirement income for Americans, the investment management industry will be charged with finding ways to guarantee that people's life savings will still be there after a bad year in the stock market. Whereas in the past, 401(k) consultants have been critical of paying the higher fees for qualified annuities within already tax-qualified plans, given the harsh lessons of the financial freefall of 2008 and the oncoming rush of Baby Boomers, the attitude toward guaranteed income is doing an about-face.
"A bear market has a very significant, detrimental impact on your ability to replace income," said Dominic Falaschetti, vice president of investment strategies for Mesirow Financial.
Younger investors have time to recoup such losses earlier on in their careers, he said, but one bad year could wipe out a decade's worth of savings if a bear market happens right before or during retirement. Without question, that has been the experience of millions of retirees this year, some of whom have lost half of their retirement savings.
"When you have a longer time horizon, the risk of equities decreases," Falaschetti said.
"One thing nobody can control is what the market does in the years before and during retirement," Ades said. "The sequence of returns has a huge impact on a portfolio, particularly near retirement. This is one of the shortcomings of target-date funds, and guaranteed income is a way to fill that gap."
Target-date funds were recently approved as a QDIA for 401(k) automatic enrollment under the Pension Protection Act of 2006, but there is some confusion as to whether guaranteed income qualifies as well.
"The QDIA regulations have been written broadly enough, but we're still waiting for clarity among plan sponsors and the [Department of Labor]," Ades said. "We think guaranteed-income products will have the broadest impact as a QDIA."
Because investors have made it abundantly clear that they don't have the time or the interest to manage their own 401(k) plans, it is essential for plan sponsors to come up with the best default option and automatically enroll everyone in it, as long as participants have the opportunity to change their plans or opt out altogether.
A recent survey by AXA found that less than half of the population has access to a financial planner, and 71% of employees thought it was their plan sponsor's responsibility to prepare them for retirement, Ades said.
Many plan sponsors are still using the "spray and pray methodology," giving plan participants a million products and then letting them choose the best option, said Mary Hollingsworth, senior vice president and director of participant solutions for Wachovia Retirement Services.
"A significant number of participants are in three or more target-date plans," Hollingsworth said, adding that it defeats the purpose of target-date funds. "The real challenge is figuring how to educate investors and put the right participant in the right solutions."
"People don't like to spend a lot of time trying to figure this out," Ades said. "Simple trumps choice. People tend to be instant-gratification-oriented."
When looking for the ideal retirement product, AXA found that consumers look for security, peace of mind, ease and personalization, Ades said, noting that living benefits that provide income for life were the most popular, while principal protection was the least popular.
"Investors don't want to outlive their savings, but they still need to participate in the upside of the market," Ades said. "We need to be looking at features in accumulation and in decumulation."
An auto-enrolled plan will never take the place of a well-educated, patient investor, but it's better than nothing. Defaulting employees into a stable-value fund is better than nothing, too, but not by much.
"From an asset-manager perspective, the nice thing is that [guaranteed income] allows participants to be more aggressive in equities for longer," Ades said. "Plan sponsors can tell participants, 'If you do nothing, I'm going to put you into this plan and automatically increase your contributions over time. I can't promise you you'll have enough money, but I can tell you how much you'll have when you retire.'"
Ades said that a guaranteed minimum withdrawal benefits for life feature begins looking at an account value at age 55 and calculates the income base at the high water mark, even if the account value has dropped.
Ades said a lot of companies have gone to market with guaranteed-income products and all of them are a little different.
"The challenge is finding product solutions that drive participants to products," Falaschetti said.
"Larger plan sponsors will be looking for multiple insurers," Ades said. "Sponsors can select an option that matches their employee base and benefits their philosophy."
AXA has been a thought leader in the guaranteed income space for the past 10 years, she said, and the company looks to partner with recordkeepers and asset managers to deliver solutions to plan sponsors. "This is a huge opportunity, and we are leading the charge."
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