Advisers will need to master expanded products

Financial advisers face an array of challenges in the retirement market in the next decade. One of the key challenges will be the ability to provide clients with products that can help them generate a healthy retirement income, industry leaders said. "There are a whole different set of threats and things people need to be concerned about in the income payout phase than in the accumulation phase," said Mike Gallo, senior vice president of retirement for New York Life Insurance Co. The retirement arena and 401(k) market in particular will continue to see more innovative and customized products that will make things far easier for participants, industry leaders said. Despite the optimism, there are clearly challenging issues associated with income generation for clients, according to Larry Roth, chief executive of New York-based AIG Advisor Group Inc. "What we've seen change is [that] almost all of the successful independent advisers are being forced to be rollover experts," he said.

NEW 401(K) OPTIONS

Experts say that 401(k) plans will become more sophisticated in the next decade by offering new alternatives, including real estate investment trusts, emerging-markets funds and non-correlated assets, said Anne Lester, managing director and senior portfolio manager of JPMorgan Asset Management, a unit of JPMorgan Chase & Co. of New York. Advisers will have to stay abreast of new-product developments so they can remain competitive by offering clients the best combination of investment options, she said, adding that staying current also will help retain good relationships with plan sponsors. Succeeding in a 401(k) plan will also become much easier for participants, said Kristi Mitchem, head of the U.S. defined contribution business for Barclays Global Investors in San Francisco. She thinks that automatic features will continue to be popular. "Plan sponsors are looking to make success easy for participants," Ms. Mitchem said. "They're doing things that will combat participant inertia so that if a participant does nothing, they'll [still] be successful. Ms. Mitchem thinks that employers will offer a greater number of packaged solutions similar to target date funds, as well as slightly more customized options for participants, including products that home in more on distribution. "I think we're going to see higher-quality institutional-type tools available in a larger segment of the defined contribution universe, with more commingled trust vehicles," she said. Meanwhile, more packaged solutions will continue to emerge in the 401(k) arena, said Jason Hubschman, a New York-based director of structured products for DWS Scudder of Chicago, the U.S. retail division of the asset management subsidiary of Deutsche Bank AG of Frankfurt, Germany. "I think what you'll see going forward is outcome-determined products," he said. "These will be some type of protected products in the 401(k) space that can provide a nice hedge for volatile markets." While products in 401(k) plans will become more sophisticated, advisers will concurrently face the challenge of trying to keep costs low for plan sponsors, said Jim Langenwalter, chief sales and marketing officer of Charlotte, N.C.-based RolloverSystems Inc. "The plan sponsors are feeling the pinch on the cost side," he said. Advisers in the 401(k) arena also face competition because the market has matured. "That puts pressure on the adviser and provider. If they can differentiate themselves to help reduce overall expenses of the plan, that creates a way they can win more business," Mr. Langenwalter said. Look for the Roth 401(k) plan to gain popularity in the next decade. However, even though legislative obstacles have been cleared, employers and employees remain slow to embrace the Roth 401(k) plans, which allow employees to withdraw money tax-free after making contributions with post-tax dollars. Only 22% of 429 employers surveyed last year by the Chicago-based Profit Sharing/401k Council of America offered Roth 401(k)s to employees. In workplaces where such accounts were available, only about 8% of employees had signed up. A new report from the Merrill Lynch Retirement Group showed that 12% of the company's defined contribution clients had adopted a Roth 401(k) option as of March 31. However, the Pennington, N.J.-based unit of Merrill Lynch & Co. Inc. of New York said the number of companies adopting the Roth 401(k) jumped 21% in the first quarter of 2008. "I'm surprised that enrollment hasn't picked up [more]," said David J. Campbell, a principal of Bingham Osborn and Scarborough LLC. The Menlo Park, Calif., firm manages about $2 billion in assets. Mr. Campbell believes that the Roth 401(k) plan will be a huge part of companies' retirement plans in the coming decade despite the slow start. Certainly, the plans may seem confusing on the surface, but he believes that participants could understand this option if it were made available to them. "I think consultants have argued against the Roth 401(k) because they say it's too confusing of an option for participants. I think they're selling short participants in the plan." E-mail Lisa Shidler at lshidler@investmentnews.com.