Retirement investment products are failing too many investors, according to a group of researchers, but there may be a better way.

Most retirement investors seek both income and capital preservation, says Lionel Martellini, director of EDHEC Business School and its Risk Institute, but current asset classes and products are giving these investors too little of either.

Martellini, along with Nobel laureate Robert C. Merton and Arun Muralidhar, an associate professor of finance at George Washington University, proposes “retirement bonds” that would help investors replicate income and replace part or all of their traditional bond portfolios as a solution.

The researchers believe that current retirement products like target-date products, balanced funds and annuities do not fit the actual needs of individuals, and that asset managers should take a more objective or goals-based approach to creating retirement investments. Accordingly, they are attempting to take the best attributes of these vehicles and meld them into a new security.

“Annuities are opaque, costly and mostly irreversible unless you’re willing to pay high surrender charges,” says Martellini. “If an investor is still relatively young, they don’t know what their life has in store for them, and they won’t want to use annuities as much as we may think they should. On the other hand, annuities do a good job taking out longevity risk.”

With relatively few investors and advisors relying on annuities to create stable sources of retirement income, investors have to accept significant market risk to generate the income or returns needed to fund their retirements.

At the same time, a global pension crisis is being exacerbated by a slowdown in demographic growth. The number of workers funding pensions and pension-like social security schemes continues to decline in proportion to the number of retirees drawing income. This imbalance is putting pressure on sovereign governments, municipalities and businesses and fueling a global transition to corporate-sponsored defined contribution plans.

“Existing products often offered as default options in the retirement context have no ability to secure retirement goals,” says Martellini. “They can’t generate a fixed level of income in retirement. The investor is buying a lottery ticket, and if they’re lucky, markets will do well and they’ll enjoy good performance, but the negotiating power of their wealth in retirement is completely out of their control.”

Martellini and his colleagues coined the phrase “flexicurity” to define the ideal investment solution for retirees. At heart, most retirement investors want security and a guaranteed stream of income, but they also want the flexibility to adjust their investments and their potential income stream over time. For the retirement-focused portfolio, goals like outperforming other investments or reaching a target asset level are more aspirational than essential.

First « 1 2 3 » Next