"Is it desirable for people to plan on using their homes to create retirement income? Yes. Is it realistic? No." says EBRI's Salisbury. The pros and cons of other income sources should be considered, he says. For instance, Medicare and bankruptcy rules might adversely affect IRAs in a way that an annuity would not, he adds.
Industry observers say advisor compensation must be addressed before the planning community adopts annuities as a post-retirement income distribution strategy. Many advisors who now earn fees from assets under management could lose up to 50% of their recurring revenue were they to invest up to one-half of a client's assets-as some research suggests would be appropriate-in an annuity. "Everything hasn't caught up yet," says Henkel. "It's not like people haven't been imaginative regarding compensation. Someone will figure it out."
Salisbury and others suggest that clients should seek advisors who are free from the conflict of interest of managing money while also providing retirement-income distribution advice and who evaluate clients on an individual basis. "Many use average life expectancy, and as a result they are guaranteed to be wrong half the time," Salisbury says.
Compensation is one hurdle, but there are others. Product manufacturers and service providers need to offer more education and choices that address the chief disadvantages of annuities. For example, the universe of intermediate variable annuity providers was 20 companies in 2001 and is not much greater today, according to DSG. What's worse, Jim Sholder editor of DSG Dimensions, a DSG quarterly publication, wrote, "Few executives believe the opportunity is immediate, and therefore little in terms of resources is applied to delivering retirement income solutions."
Cerulli agrees. He noted in his ICI speech that distribution costs, technology and compensation are barriers that must be overcome to advance new product introductions, including the bundling or combining of elements from a variety of markets, such as banking and insurance. Unfortunately, firms are hesitant to allocate resources to new market ventures. "Return-on-equity constraints hamper investments in low-revenue, high-cost markets," he says.
Educating advisors and consumers will prove to be part of the solution, say Cerulli and others. Value-added services and financial planning support in the form of case studies, client seminars and comprehensive planning tools will also help put the subject of retirement income distribution on the radar screen. "There is fear that if you buy a pure annuity, you will lose the money if you die before your life expectancy," says Frank Gencarelli, an executive vice president with GE Financial Services' Retirement Services Group in Richmond, Va.
He adds the same principle that applies to car insurance applies to insuring retirement income. "Living beyond one's income is not a bet I would like to lose." In 2002, GE Financial introduced an annuity called Income Manager, in which the funds are managed like a traditional pension fund, that essentially allows people to purchase their own pension. Investors are guaranteed a certain annual income, which may be increased if investment returns exceed assumptions.
The nation's largest financial firms are beginning to realize that thousands of advisors and millions of people will need help. John Benson, senior executive vice president of John Hancock Financial Services, weighed in on the subject at the annual conference of the Association for Advanced Life Underwriting. He stated the typical firms will derive 30% to 50% of its revenue from the sale of income products.
Fidelity Investments President Abigail Johnson and chief operating officer Robert Reynolds have said in public speeches this year that the giant mutual fund firm wants to become the nation's top retirement income-distribution planning expert. What's more, Fidelity has assembled a special task force comprising different business units to tackle the issue of training employees and creating tools that will meet the retirement income needs of its customers and prospects. Already, Fidelity has put together two virtual retirement income seminars.
For the financial services industry, the stakes are indeed large. With the prospect of asset growth through client acquisition growing smaller, asset retention becomes a critical concern. Financial services firms and advisors who fail to provide technical expertise and products to retiring baby boomers struggling with making their incomes last a lifetime will find themselves on the losing end of the asset retention stick.