How Boomer Retirement Offerings Must Evolve
As more of the country's 74 million baby boomers enter retirement, the funds and other savings products they have been contributing toward will be tested with withdrawal demands and questions about returns.
The assets belonging to boomers account for more than half (55%) of the current wealth management market, according to Phoenix Marketing International.
Product providers should be evaluating the durability and relevancy of their offerings, says Sri Reddy, senior vice president and head of full service investments at Prudential Retirement.
Increased longevity is one factor that will challenge the performance and use of retirement products, he says, as many boomers are expected to live as retirees for another 30 years.
At Prudential, Reddy says he and his colleagues have been actively considering the realities of the boomer generation's retirement needs, and thinking about ways to improve upon the products they are already offering. Annuities are among them, and he defends them in light of criticism they have received during the debate over the Labor Department's fiduciary rule.
"Anyone who says that any product design is bad categorically, that's not correct, and you probably don't understand how the product suite works."
Money Management Executive spoke with Reddy about boomer products, innovation and the DoL rule.
An edited transcript of his conversation follows.
How does Prudential view innovation in the retirement products industry?
Financial services, broadly, continue to evolve. There are new innovations that have come over the years because there is individual discrete risks that are new and we are still learning about.
With this notion of qualified longevity annuity contracts — having annuities that provide benefit-based compensation to the advice — these are all innovations that are happening because of the changing demographic shifts.
I wouldn't call the marketplace static at all; I think it's a very dynamic marketplace. That being said; the products themselves serve discrete needs. It's not about the generation as a whole.
Whether you are a Gen Xer, a millennial or a baby boomer, some of your needs may be shared. I think selecting a product suite addresses the need that must be addressed; specifically in terms of risk transfer, exposure to asset classes and diversification.
What are your thoughts on the debate about annuities arising from the fiduciary rule hearings?
Anyone who believes a singular product suite can address everybody with different needs; that probably doesn't work. But anyone who says that any product design is bad categorically, that's not correct either and you probably don't understand how the product suite works.
What I tell people is that regardless of your perspective on annuities, annuities are doing a couple of things well that I have found no other product can do.
For one, they absolutely pull away tail risk that individuals are not able to pull and sustain on their own. Unlike any market-oriented investment, a best efforts product is not anything like a guarantee. Only annuities and other insurance structures can absolutely provide a guarantee that's backed by capital and backed other insurance companies.
How does Prudential address an increased demand transparency amid greater cost pressure for products?
For all of the reasons companies and employers have shifted away from pension plans, the risk and unpredictability of longevity is the exact same reason individuals need to be able to create a structured, guaranteed income stream, and almost create a pension-like outcome.
When considering what might happen if there are other products that may not be as robust in the future, I think they will have to figure out how to create more guaranteed income streams with the solutions available. This is why I think there is going to be further innovation in this space.
Unlike pure pension plans, there's actually an interesting twist when individual buyers buy retirement income solution, they also demand liquidity. By definition, pension plans work because they are illiquid instruments that pool mortality.
The minute you start providing access to anyone to get their money any time, it's optionality that adds cost as well.
There's almost no question that we as a firm — and I think as an industry — are moving toward providing more transparent solutions, however with one nuance. When I open up the hood to my new car, the thing looks beautiful. I don't know what anything is, but it looks clean. I believe they are giving me transparency when I bought the car, but I don't have any idea what anything is.
The reason I teed that up as an example is because some of the challenges we are trying to address are really complex. You can't really address complex problems with simple answers. Sometimes solutions are complex too, but making them understandable and digestable so that people know what they are buying makes sense.
Does the industry need to examine how they communicate with clients?
If you look at the consumer experience, whether it's Amazon.com or your mobile telephone provider, the language and tone in which you are speaking is much more informal and probably an everyday vernacular. That's the voice that we have not perfected as an industry.
Will the industry as a whole change? I think that's hard to say, but I do think individual firms are thinking about it.
What's Prudential working on right now to improve upon its existing retirement savings offerings?
Think about some of the wonderful features of the annuities that consumers love; they love market value guarantees as it pertains to retirement income, they love hedges against longevity since there's a guarantee for life no matter what happens or how long you live, and they like liquidity.
One of the things we did, and we have been doing this for over 10 years now, is we said, "That's wonderful, but if you can only wait until you retire to access those features, it may be too late for a segment of the marketplace."
So one of the innovations I can tell you is that we offer an annuity-like structure, which offers a lifetime benefit that can be added on to your 401(k) plan. Also, target-date funds have been around now for about two decades, but they have really been gaining traction in the last 10 years.
About five years ago, Prudential entered the target-date fund space with a target-date fund that was built on a hundred years of pension experience, saying, "Well, we know that the people saving for retirement are often worst savers than they are investors, so how should they be thinking about asset classes, correlation, alternative asset classes like Direct Real Estate, TIPS (Treasury Inflation Protected Securities), commodities and thinking about equity exposure, knowing that they have 30 years of retirement after they retire?"
We asked how to build on all of that as well as with a focus on value, which means trying to get the expenses a little lower, and you tilt it with a passive/active hybrid that does all of the things that I'm talking about. That provides more equity exposure throughout retirement to help keep up with inflation, which gives the great correlation benefits of alternative asset classes. [That approach] gives a core basket of passives where there's symmetrical information of the marketplace and also supplements of active management asset classes where passive makes sense. That's another innovation that would attract baby boomers, and beyond.
I can't go into a lot of detail for the third solution, because we are still in the process of designing this, but we think about how to allow individuals to save for other things they may need in the future on a voluntary basis through their worksite. So we are thinking about how to simplify the process so people who are already contributing to 401(k)s and other things can also save in a really easy, payroll-deductible way.
What types of alternatives are best suited for the retiring baby boomer generation?
I think this depends on the individual's propensity and willingness to take on risk.
What's interesting in today's world is these clients have a choice. I would also say there are probably more mutual funds in the marketplace than there are individual equities.
When you add on top of that the various ETFs available — the specialty ETFs, the sector ETFs and the managed accounts — the choice is almost maddening.
I don't think people should worry as much about that as much as they should be more focused on being in a high-qualified, well-diversified investment or investments that give them exposure to uncorrelated assets and asset classes, or asset classes that have correlation benefits.
What you don't want to do is own five or ten different investments, which all invest in Apple, Google, Microsoft and Exxon Mobile. Even when it comes to passive investing index funds, the number one focus should be ensuring that clients understand that not all indices are created equal nor do they give you give you the same exposure to the various segments of the U.S. or global economy that you need.