The forces that drove the retirement marketplace in 2007 — the automatic enrollment and default option provisions of the Pension Protection Act of 2006, the aging baby boomers and a focus on the rollover market — will continue to shape product launches this year.
Let's look at each of the drivers.
Under the PPA and Labor Department regulations enacted in 2007, target-date retirement funds are considered qualified default investment options for participants who don't indicate a choice of investments. Virtually every investment manager has or will introduce a target date/lifecycle fund. Until now, almost all of these funds have been proprietary funds with a fund-of-funds structure. In 2008, we will see the use of lower cost ETFs and some non-proprietary structures.
We'll also see target-date funds begin to accommodate a broader range of risk strategies, including non-traditional asset classes such as 130/30 funds, global macro funds, emerging markets, REITs, commodities and natural resources.
For example, New York-based BNY Mellon Asset Management's Target Maturity Funds offer a global long-short component and systematic asset-allocation adjustment. Boston-based John Hancock Funds' Retirement Portfolio offers increased alpha.
New York-based AllianceBernstein LP introduced customizable target-date portfolios that allow for additional investment managers or changing asset allocation. To track all these variants, New York-based Lipper Inc. has introduced a target-date index that is customized to individual lifecycle funds.
Proposed DOL regulations regarding greater fee transparency will encourage many target-date providers to offer lower- cost institutional pricing, more use of ETFs and enhanced index products, and collective investment trusts. For example, Houston-based AIM Investments' Independence Target Date Funds include ETFs. UBS Global Asset Management, among others, has introduced target retirement collective funds, a target-date product in a collective trust structure. So have The Charles Schwab Corp., Great-West Life & Annuity Insurance Co., and Merrill Lynch & Co. Inc.
T. Rowe Price Group of Baltimore is entering the arena early in 2008 with a commingled version of its target-date funds. The average expense ratio for a target-date fund is 0.73% versus 0.60% for a commingled version, according to Morningstar.
The second driver of change, the baby boom generation's need to turn their nest eggs into steady streams of retirement income, will result in more annuity-like products being bolted onto traditional de-fined-contribution products. The new products will offer "guaranteed retirement income," which will become the catchphrase of 2008.
Insurance companies are ramping up both immediate and deferred annuities along with extra-cost benefit guarantees. While the high costs of guaranteed benefits — as much as 1.5% just for the income guarantee — has dampened acceptance, lower-cost variants are on the way. Fidelity Investments' Income Replacement Funds, for instance, are pre-packaged phased-withdrawal plans that offer "non-insurance approaches to guaranteeing in-come." The funds pay out principal and interest on the investor's balance until the maturity date. The monthly withdrawal rate is reset each year based on market performance.
Other new products in the pipe-line combine annuity structures with health savings accounts and long-term-care insurance.
Finally, watch for the institutions that manage 401(k) assets and defined-benefit plans to put up a big fight to retain those assets as the money moves into IRAs. The firms are starting to offer products that transition well from one side of their platform to the other. These products may include built-in annuities or embedded advice.
The biggest beneficiaries of the roll-over wave will be independent financial planners and advisers who stand ready to catch these assets as people retire or leave their jobs. Advisers who resisted offering annuities are now warming to the idea of creating "personal pension guarantees" that combine income and growth.
Andrea Trachtenberg is president of New York-based Ivory River Marketing, a strategic-marketing and business/product development consulting firm in the asset/wealth management and brokerage industries. Evelyn Ehrlich, co-author of "The Financial Services Marketing Handbook" (Bloomberg Press, 2004), contributed to this article.
For previous Retirement Watch columns and the online column, On Retirement, go to
investmentnews.com/retirementwatch and
investmentnews.com/onretirement.
