The financial industry has yet to widely embrace a solution for America's retirement income problem, although a solution may lie in investment and insurance products, according to a panel of investment management executives.

Panelsts at the Morningstar Investment Conference in Chicago last week said we’re likely just scratching the surface of the problem as more retirees leave the workforce dependent on income they saved themselves in lieu of an employer-supported pension.

“You’re now seeing people with no legacy defined-benefit [plan] retire,” said Anne Lester, portfolio manager and head of retirement solutions for J.P. Morgan Asset Management’s Global Investment Management Solutions. “That problem is only now beginning to become acute. There’s going to be a different demand drive than there has been before.”

Thus far, most of the innovation in investment product development has focused on the accumulation phase of an investor’s life, said Lester. But with growing ranks of baby boomers entering retirement, the time has come for products that address the decumulation needs of investors, she said.

Lester said that even very wealthy investors feel anxious about the possibility of outliving their savings. The anxiety leads to unnecessary frugality and under-consumption, she said.

In some cases, she said, the anxiety has prompted investors to craft elaborate portfolios designed to capture enough interest and dividend income to address their spending needs.

“With high interest rates, you could live off of dividends and interest, but we don’t live in that world anymore,” said Lester.

With the 10-year Treasury yielding just below 2.4 percent, and the S&P 500’s dividend yield averaging just above 1.8 percent, it’s difficult to create a low-cost income stream with investments alone.

The low-interest, low-return environment is going to create serious retirement income problems for investors and asset managers alike, said Brett Sumsion, a portfolio manager at Fidelity Investments.

“One of the concerns we have is where we are technically in the capital markets,” said Sumsion. “What the capital markets are providing for today—we’re worried about how that interaction goes. We’re at an extreme, considering GDP potential, labor force growth and productivity growth. This is the reasoning around ‘lower for longer.’ Interest rates are anchored to those same forces.

“All at the same time, we have this huge population that needs retirement income," he said. "The need for diversification is ever greater. That diversification may be the combination of an investment portfolio with a guaranteed income offering. That’s where you’re going to have to see innovation.”

Investors face three main risks when designing a retirement income strategy, said Kelli Hueler, founder and CEO of Hueler Income Solutions, an income annuity purchase system allowing individual clients access to institutionally priced annuities.

“Longevity, market risk and inflation are the biggest ones,” said Heuler. “There’s also sequence of returns risk. If you think about the people who retired in 2008 ... they experienced very positive returns in the earliest phase of their retirement that kind of got masked in the market shock. That’s the one thing I would say is the biggest risk.”

Annuities can help address market and sequence of returns risk, said Heuler, but they have not been embraced by investors due to concerns surrounding cost, complexity and liquidity.

There’s also a problem with the annuity sales process, said Heuler.

“Obviously, annuities are often misunderstood, complex and frustrating for people, but there’s also often a conflict of interest there for the people who are providing the advice,” she said. “It can take away from the AUM and other income they’re receiving for advice.”

Heuler said that one of the most glaring signs that someone has received bad advice regarding the purchase of an annuity is when they’ve been directed to annuitize most or all of their assets. Heuler Income Solutions usually sees investors annuitize 20 percent to 25 percent of their assets, and forbids the use of more then half of their assets in an annuity.

Managed payout funds are another potential retirement income solution, said Sumsion.

“If you ask people if they need help determining how much to withdraw, 73 percent say yes,” he said. “A managed payout solution helps people solve that specific problem. It’s a compromise between what the capital markets can deliver and people’s expected retirement timeline that can give people confidence that they won’t run out of money.”

Managed payout funds attempt to pay out a stable income to investors over time, but will fluctuate in times of lower interest rates.

When investment income and capital market returns drop, both insurance solutions in the form of annuities and investment solutions like managed payout funds can struggle. Lester explained that many managed payout funds launched in 2007 and 2008 as the global financial crisis loomed.

“A lot of us learned a lot as investors through that cycle,” said Lester. “The design of the product has to explicitly embrace a level of uncertainty around how much can be taken out every year. If we say you can get 5 percent every year no matter what, that might not be true.”

While 401(k) plans have embraced target-date funds as default investments, most of the funds have been designed to get investors to retirement, not through retirement.

That’s started to change as target-date funds have added guaranteed income components like annuitization as part of their allocations, creating what Sumsion called a “one-size-fits-most solution” for accumulation and spending down assets.

As more adaptive “flexible” technology is adopted, retirement income planning will become more personalized, said Heuler, because advisors will be able to efficiently construct more solutions out of a number of income products and strategies.

“Advisors are going to embrace flexible technology that will allow them to create customized income streams,” said Heuler. “We think asset managers are also moving in that direction. In five to 10 years, the landscape will look dramatically different and personalization will be the norm. The infrastructure in the 401(k) space is going to have to change dramatically, and flexible technology will be a part of that.”