the retirement income opportunity: roles for financial services providers february 12, 2007 jerome...

The Retirement Income Opportunity:

ROLES FOR FINANCIAL SERVICES PROVIDERS

February 12, 2007

Jerome P. Kenney

NY002MIQ.ppt 1/17/2007 12:54 PM (2)

$23.7

$26.2

$19.2

$15.8

$12.5

$9.4

'06E '08E '10E '12E '14E '15E

Demographics Are Eye-Popping: Retirement Age Population Will Increase 63% From ‘00 – ‘20. Assets Will Double by ‘12

Change in Population Growth2000 – 2020

GrowthRate 12% 8% 13% (5%) 9% 76% 56% ’00-’20

3.2

(2.3)

5.23.0

7.1

19.618.5

< 14 15 -24

25 -34

35 -44

45 -54

55 -64

65+

3.2

(2.3)

5.23.0

7.1

19.618.5

< 14 15 -24

25 -34

35 -44

45 -54

55 -64

65+

10.1 Million

38.1 Million

Source: US Census

Assets Held by Investors Over Age 60 ($ Trillions)

6.1 Million

16.1 Million

1

Source: Cerulli Associates – Retirement Edge, November 2006

CAGR2006 – 2015: 12.1%

NY002MIQ.ppt 1/17/2007 12:54 PM (3)

Retirement Plan Assets = 44% of US Fin Wealth. These Plans

+ Taxable Assets of People >55 (56%) = $25.2T or 75% of Total

Source: Federal Reserve Flow of Funds, ICI and Merrill Lynch segmentation estimates

39%

61%

39%

61%

64%

36%

64%

36%

74%

26%

74%

26%<55

>55

Age

Taxable Assets$18,538

56%

Retirement Plan Assets$14,837

44%

PrivateDB

$1,842

Dep, CDs,MMFs

$6,071

EQ, FI, Ins, MFs

$12,467

IRAs

$3,958

Gov’t Plans

$4,026

Annuities

$1,591

DC

$3,420

20%

80%

20%

80%

53%

47%

53%

47%

50%

50%

50%

50%

55%

45%

55%

45%

Total Financial Wealth – Q3 2006$33,375

2

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The Individual Will Shoulder Responsibility For Retirement Savings, Investments, And Creating Income From Assets

The Individual Will Shoulder Responsibility For Retirement Savings, Investments, And Creating Income From Assets

$2.6$2.3

$1.6

'96 '06 '11

Growth In The Retirement Market Will Come From Retail-Oriented Programs: DC, IRAs, Annuities

DB DC IRA

$1.6

$2.9

$4.2

'96 '06 '11

$6.7

$4.1

$1.5

'96 '06 '11

GrowthDriver:

3.6% 2.6% 6.5% 7.8% 10.7% 10.6%

Market appreciation only

Contributions Auto enrollment Auto escalation

Rollovers Contributions

($ Trillions)

Annuities

1996 2006 2011

VA FA

7.4% 7.4%

$0.9

$1.9

$2.7

Retirees seeking income

3

NY002MIQ.ppt 1/17/2007 12:54 PM (5)The Outlook for Net Flows Is Positive For IRAs, DC & VA’s. In ‘07 Expect >$180 Billion in Flows From These Products

Net Flows($ Billions)

Source: Department of Labor, Federal Reserve, Cerulli Associates and Merrill Lynch estimates on variable annuities.

IRAs

DC

DB

VariableAnnuities

($67)($47)

($67) ($76)($63)

($18) ($24)

($74)($85) ($78) ($85) ($92) ($99) ($106)

($113)

$13

$88

$51 $52

$22 $31$45 $40

$38 $40 $43 $47 $51 $54 $57

$45

$55

$98$109

$69 $65$81 $79 $85 $90

$101$109

$120$131

$149

$46 $40$31$30

$44$47$51

$59

$19$38 $40 $41 $43$42$42

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

($67)($47)

($67) ($76)($63)

($18) ($24)

($74)($85) ($78) ($85) ($92) ($99) ($106)

($113)

$13

$88

$51 $52

$22 $31$45 $40

$38 $40 $43 $47 $51 $54 $57

$45

$55

$98$109

$69 $65$81 $79 $85 $90

$101$109

$120$131

$149

$46 $40$31$30

$44$47$51

$59

$19$38 $40 $41 $43$42$42

'97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11

4

NY002MIQ.ppt 1/17/2007 12:54 PM (6)

The Pension Protection Act (PPA) Of 2006 Will Help Increase DC Savings Contributions to 401(k) accounts can grow based on inflation index each year.

Higher contribution limits made permanent.

Auto-enrollment is legal in all 50 states. Estimate increase in participation from 66% to ~90%.

Investment default options favor lifecycle funds vs. cash

Expect a marked decline in money market funds and stable value to a lesser degree as default options.

Automatic deferrals likely to start at 3% with auto-escalation of 1% for 3 years for plans to escape non-discrimination testing.

PPA allows for greater level of advice in DC plans through managed accounts and one-on-one counseling.

IRA plans can be combined with other IRAs, DB cash value plans, profit sharing and IRAs passed on to heirs.

5

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Financial Position For The Median American Family – 2004 ($ ‘000)

Financial Position For The Average Baby Boomer – 2004 ($ ‘000)

$254

($105)

$149

$466

$615

FinclAssets

Debt Net Fincl

Position

Non-Fincl

Assets

NetWorth

The Median American Family Is In A Net Financial Deficit. The Average Baby Boomer Fares Better Largely Due To House Appreciation

Source: Survey of Consumer Finances 2004, Federal Reserve Source: Cerulli Associates – Advisor Metrics 2006

$23

($55) ($32)

$148$93

FinclAssets

Debt Net Fincl

Position

Non-Fincl

Assets

NetWorth

6

NY002MIQ.ppt 1/17/2007 12:54 PM (8)

Most Wealth Is Concentrated In A Small Percentage Of Households. Baby Boomers Are Generally Not Well-Positioned For Retirement.

Most Wealth Is Concentrated In A Small Percentage Of Households. Baby Boomers Are Generally Not Well-Positioned For Retirement.

Just 1% Of Retiree Households Are HNW (>$2.5MM Fincl Assets), But These Households Control $4.7T In Assets

Retiree Asset Segmentation

2005 2020

HNW39%61%Not

HNWHNW56% 44%

NotHNW

Total = $12,344 Billion Total = $35,419 Billion

7

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15%3%

14%6%

32%30%

32%

38%

401(k) Assets by Age Group2005

401(k) Balances by Size of Account 2005

Nearly 2/3 Of 401(k) Assets Are Held By Participants In Their Peak Earning Years (40-59), But 70% of Balances Are <$50,000

2005 balances: average = $58,328; participants in their 60s = $180,988

Source: Cerulli Associates, Retirement Markets 2006

Here Lie The Seeds Of A Retirement Crisis For Workers Who Don’t Adequately Plan For Retirement And Do Not Understand The Risks Of Outliving Assets

Here Lie The Seeds Of A Retirement Crisis For Workers Who Don’t Adequately Plan For Retirement And Do Not Understand The Risks Of Outliving Assets

<29

40 to 49

30 to 39

50 to 59

60 to 64

>65

16%

14%

<$10,000

$10,000 to $49,999

$50,000 to $100,000

>$100,000

Source: Cerulli Associates, Retirement Markets 2006

8

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Aggregate Retiree Income By Source – 2004

Source: Cerulli Assoc, Retirement Markets 2006

26%

13%

20%

38%

3%

Other (incl. Public Assistance)

Social Security *

Earnings

Asset Income

(incl DC, IRA)

Private Active DB Participant as % of Private-Sector Workers

2005

New Retirement Income Products and Decumulation Services Will Take the Place of Traditional Pensions

New Retirement Income Products and Decumulation Services Will Take the Place of Traditional Pensions

Social Security & Pensions Generate 58% of Retirement Income. With DB Declining, Individuals Must Rely on Other Income Sources

* Maximum SS: $25,392 Average SS: $12,528

Sources of Retirement Income Retirees vs Pre-Retirees - 2005

Source: Cerulli Assoc, Retirement Markets 2006

1996 2005Total Private Sector 101.4mm 113.7mmWorkers

Source: LIMRA – Retirement Planning 2006

DB Pensions

22.1%

17.7%

9

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Retirement Planning Activities


Sources Consulted For Retirement Planning – 2005

Boomers who sought professional assistance and developed a retirement plan reported that they had saved twice as much ($1.8mm vs. $950,000) as the group who did not seek professional advice. LIMRA / Ameriprise

Boomers who sought professional assistance and developed a retirement plan reported that they had saved twice as much ($1.8mm vs. $950,000) as the group who did not seek professional advice. LIMRA / Ameriprise

For Many People, Retirement Planning Consists Of Estimating Income & Expenses. Only 22% Of Pre-Retirees Surveyed Created An Income Plan


=

10

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Retirement Risks Advice Gap

Health care is the second largest expense in retirement (following housing) and is perhaps the biggest risk to the success of a retirement income plan. Fidelity


Retirement Planning Should Address Risks Facing Retirees, But There Is an Advice Gap With Respect to Solutions

Rising health care costs

Longevity – outliving assets

Inflation

Long-term care

Asset allocation

Asset withdrawal rate

8%

2%5%

2%

11%

21%

28%

13%

Critical IllnessInsurance

L-T CareInsurance

LongevityInsurance

ReverseMortgage

Currently obtain from advisorWould like to discuss with advisor

Source: Fidelity – Adapting a Practice for Retirement Income Planning

11

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Differentiating Advisor Expertise

Critical illness insurance

Long-term care insurance

Longevity insurance

Reverse mortgages

Asset drawdown strategies

Knowledge of Medicare, Social Security, Medigap plans

Prescription drug plans

Tax implications associated with asset withdrawal

Income strategies

Estate planning

Firms Who Have Expertise in the Broader Aspects of Retirement Will Be Able To Differentiate Themselves

The advisor’s role will become more akin to an HR benefits specialist where the advisor helps retirees administer their retirement.

The advisor’s role will become more akin to an HR benefits specialist where the advisor helps retirees administer their retirement.

12

NY002MIQ.ppt 1/17/2007 12:54 PM (14)

Where Do You Fit In Terms Of The Retirement Income Opportunity?

NY002MIQ.ppt 1/17/2007 12:54 PM (15)

Service Provider Product ProviderAsset Gatherer /

Financial Advisor

There Are A Number Of Ways To Participate In The Retirement Market Opportunity

Recordkeeper

Technology firm outsourcer

Attract and grow assets – DB, DC, IRA

Scale / efficiencies

Asset management

Insurance

Income products

Penetrate retail and institutional channels

Best of breed

Retail orientation

Advice

Rollovers

Complete product & service array

End-to-end solutions

13

NY002MIQ.ppt 1/17/2007 12:54 PM (16)

In DC Administration, Opportunities Are Shrinking As Consolidation Continues, Similar To Global Custody

Aside from the big 4, asset managers have exited recordkeeping to focus on being product suppliers

Only 2 banks and 4 insurers are in the top-tier

$3.1

Assets Under Administration ($ Trillions)

Top 5

Top 10 Top 25 Top 50

Source: Pensions & Investments.

Top DC Recordkeepers – 2006

$2.3

$8.7

DC Global Custody

14

NY002MIQ.ppt 1/17/2007 12:54 PM (17)

Segment Rationalization($ Millions)

Technology-Oriented Processors Are Gaining Market Position by Providing Outsourcing Capabilities To DC Recordkeepers

American Funds FASCore

Bank of America ADP/Aegon

Mercantile Bank BISYS

Morgan Stanley ADP/Fidelity

PaineWebber MFS

Fifth Third Bank FASCore

GE BISYS

ING DST

Federated FASCore

Am Express FASCore ($5-$50)

Merrill Lynch BISYS (<$3)

Prudential BISYS (<$3)

TR Price Trustar (sm plans)

US Bank BISYS (sm plans)

Delaware BISYS (sm plans)

Schwab Local TPA’s (<$20)

AIM DAC and CPI

Franklin Res FASCore

Source: 401(k) Exchange

Full Outsourcing

15

NY002MIQ.ppt 1/17/2007 12:54 PM (18)

For Product Providers, It’s Still Early. Focus Will Shift From Accumulation To Distribution & Towards Guaranteed Income

Guaranteed IncomeGuaranteed Income

Investment Products

Investment Products

Insurance Products

Insurance Products ProcessesProcesses

Principal protection

TIPs

Annuities

Stable value

Systematic Withdrawal Income Programs (SWIPs)

Achieved Through

16

NY002MIQ.ppt 1/17/2007 12:54 PM (19)

For Asset Gatherers, The IRA Market Is Underpenetrated: The Top 5 Firms Capture 40% Of Rollover Dollars; The Top 10 – 55%

Market Share of Firms Receiving Rollover Dollars

Job Changers Retirees

Source: LIMRA Staying in the Game: Retaining Rollover Assets, August 2006. Based on respondents with corporate DC plans who (A) rolled their money to IRAs or took lump sum cash distributions and saved some or all of the money and (B) identified the firm receiving the plan assets.

Fidelity

Wachovia

MerrillLynch

Prudential /CIGNA

Ameriprise

Charles Schwab

Wells Fargo

All Others

Wachovia

MerrillLynch

MorganStanley

Charles Schwab

RaymondJames

Edward JonesCitiStreet

All Others

2%2% 3%4% 5%

5%5%7%

8%

14%

45%40%

3% 3% 4% 5%5%

5%

7%

10%

14%

Edward Jones

CitiStreet

Ameriprise

Fidelity

Vanguard

17

NY002MIQ.ppt 1/17/2007 12:54 PM (20)

A Handful Of Firms Will Provide End-to-End Retirement Solutions, Driven By Advice

Advice Investments Health Care Insurance Estate

Planning

Products Lifecycle Funds Principal

Protection Annuities Reverse

Mortgages LT Care

Insurance Trust

Process Investment

strategy Asset drawdown Budget Income distribution Income mgmt

accounts Risk mgmt

18

NY002MIQ.ppt 1/17/2007 12:54 PM (21)

For Financial Advisors, Client Wealth Tiers Will Drive Retirement Strategies, Products And Advice Delivery

19Source: Tower Group and Merrill Lynch

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Retirement Is Shifting From Institutional To Individual Responsibility

1. A) The individual is the ultimate client, so products need to be: Easy for an advisor to explain Easy for the individual to understand and use Best in class

B) People will need advice on assets, income, health care, insurance

2. Client wealth tier will determine product and advice offering.

3. Differentiating your firm is crucial; e.g., Full product and service range Benefits expertise Retirement services specialist

4. Product providers need to maximize distribution Registered Investment Advisors (RIAs), Financial Advisors (FAs) Platforms: DC, annuities, DB; or separate accounts, IRAs, annuities Distribution alliances

5. Service providers need to attract, grow and retain assets

6. Distributors should focus on becoming primary advisor; asset consolidator

7. Advisors need to acquire expertise in all aspects of retirement.20

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Bear in Mind

1. People are more apt to plan a vacation than their retirement.

2. The mass market / mass affluent are known for spending – not saving.

3. Most people just want advisors to tell them what they should do.

4. Most people will need to create their own retirement income.

5. Products on autopilot work well.

6. It’s a new balancing act – assets, income, protection, expenses.

7. The first 4 years of retirement are crucial to a portfolio’s success.

8. The employer is where individuals are first exposed to retirement products.

9. Health care costs will likely be a bigger issue for retirees.

10. There’s still time. We are only at the beginning of the retirement income opportunity which peaks in 2026.

21

the retirement income opportunity: roles for financial services providers february 12, 2007 jerome...

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