For a look at the retirement products advisers can expect in 2010, the insights of some literary greats — Charles Dickens, Voltaire, Lord Byron and Jane Austen — may be more illuminating than you would imagine.
Any prediction about retirement products assumes, among other things, that product designers and advisers have figured out what retirement means in today's economy. There was a time when retirement generally meant that the married male “breadwinner” had stopped working and started living on savings, a pension and Social Security.
Today, there may be two working members of the household, each stopping work at a different time, to a different degree, and seeking second-life pursuits in the face of enhanced longevity.
Alternatively, there may be a single unmarried female with lifestyle and retirement-planning decisions to make. Throw into that new demographic mix the current economic turmoil, lost savings, lost jobs and the costs of health care, and you have more than enough uncertainty to challenge any product creator or adviser.
At the same time, virtually all consumer surveys report that more people are looking for advice. The advice they seek is not necessarily about investments but more about help with tough questions surrounding outliving assets, providing for dependents, becoming disabled, coping with catastrophic illness, and best tax outcomes.
DICKENS AND VOLTAIRE
The underlying answer to all of these questions was proclaimed years ago by our literary giants and still rings true. Dickens said: “Buy an annuity cheap and make your life interesting to yourself and everybody else that watches the speculation.”
Voltaire did him one better by saying: “I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left.”
Byron could have been an insurance marketing executive when he said: “"Tis said that persons living on annuities are longer lived than others.”
The surprise of 2009 was that Congress, the Labor Department and other entities suddenly rediscovered the wisdom of these sages.
But all the enthusiasm that has suddenly surfaced for annuities doesn't answer which kind of annuity — immediate, deferred, fixed, variable, or one with a guaranteed-minimum-withdrawal benefit or enhanced death benefit — works best for a particular client.
Also unanswered is whether long-thwarted contingent annuities can overcome prohibitive hedging costs to support guarantees, which would permit them to resurface and forge the long-overdue union between money managers and mutual funds.
Unfortunately, last year, the Office of General Counsel of the state of New York's Insurance Department characterized contingent annuities as an impermissible form of financial guaranty insurance.
Another cloud on the new-retirement-product front is the Securities and Exchange Commission's concerns about target date funds.
The SEC soon plans to initiate an inquiry into the funds' “set it and forget it” slogans. Nevertheless, despite the criticism from Congress and the SEC, target date funds remain a useful and likely retirement offering.
An alternative to target funds are managed-payout funds, which may see a revival in 2010. One reason is their implicit recognition of the new investment model of safety first, either through Treasury inflation-protected securities or some other core protection.
Similarly, stable-value products have great potential appeal. However, not unlike the hedging problem of contingent annuities, economic turmoil has made stable-value-wrap providers and related products harder to come by.
Rather than looking for a breakthrough product, however, advisers may find more value in seeking out dramatically different analytical tools and models that better account for the diversity of essential needs among imminent and future retirees. The core principle for all retirees and near-retirees may be that any risk is too much if there is no income floor.
Like the literary lions, we are beginning to recognize that safety is at the heart of retirees' needs.
Austen may have gotten to the heart of retirement product design when she noted: “An annuity is a very serious business.”
Joan E. Boros is a mutual fund investment adviser and insurance products securities lawyer with Jorden Burt LLP. She is also on the board of the Retirement Industry Income Association.
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