Saturday, June 7, 2008

Positioning Annuities for the Retirement Wave

The June 2, 2008 issue of the Wall Street Journal includes an article entitled “Riding the Retirement Wave.” It is an article about the latest trend in mutual fund product development: managed payout mutual funds, which are designed to help boomers turn their savings into a steady stream of checks.

The advantages of the new managed payout funds are that they invest in multiple asset classes, they allow investors to withdraw their money at any time just like a traditional mutual fund, and the account balance can be passed along at death. The catch is that the funds’ values and payouts will fluctuate based on market returns. The funds can plan and promise projected payouts, but ultimately there are no guarantees.

According to the article, “most firms quickly point out that these [managed payout fund] products shouldn’t be considered substitutes for guaranteed annuities. For those whose nest egg is just sufficient to cover their expected cost of living, annuitization is likely the right decision because these retirees can’t tolerate much risk.”

This begs the question, what do some customers find unsatisfactory about annuities? The article answered that the disadvantages of annuities are that consumers fear the loss of liquidity, they feel that annuities have hidden fees, they don’t know how their money is being used (lack of transparency), and they feel that many annuities are too complicated.

So, as an industry, we can see our challenge. Part of the challenge is positioning. Annuities are criticized as complex and non-transparent, yet managed payout funds are surprisingly complex and non-transparent products. Regular statements are needed for these managed payout funds to show investors what fraction of each payout came from income earned by the fund, capital gains, and what was made from return of capital. The amounts paid out by the funds will fluctuate based on market returns.

Also, just because a fund carries a certain label, it does not necessarily make that fund consistent with other funds carrying the same label. For example researchers, at Financial Research Corporation in Boston recently looked at the assets of 58 mutual funds designed for workers planning to retire in 2020. Their findings were that the amount of holdings invested in stock, stock funds, and related instruments varied from 51% to 95%!

So, we must conclude that the mutual fund industry has taken very complex financial products and successfully positioned them as easy for the consumer to understand. Also, annuities are criticized as having hidden fees. Yet, every so-called “no load” mutual fund has an expense ratio that is never revealed on an account statement, only in a prospectus.

The payout phase of life is the phase where annuities should take center stage over mutual funds because of annuities’ guarantees and other safety features. If the mutual fund industry manages to capture the lion’s share of client assets during the payout phase of life, it will leave our collective retirements less secure, which could be a tragedy for us all.

What can we, as annuity creators and marketers, do to position the benefits of our products more successfully? Where should we focus?

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