When the Departments of Labor and Treasury sent out an RFI on annuities as
Clearly, annuities are
What was in your response to the request?
When we were posed with the question, "Should annuities be in 401(k) plans?," we stopped before we even answered the question and said, "Here are some things that we need to fundamentally change."
We focused on three areas. First and foremost is just education. We see an enormous educational gap in terms of peoples' basic understanding of today's annuities versus annuities of the past.
Secondly, if annuities start to become embedded in traditional employee benefits, the level of transparency is going to need to be enhanced from where it is today.
Third, annuities historically have just been built for individuals and have not accommodated group-type plans where you need the ability to accept premium on a regular basis and to have a level of portability.
What turned people off previously?
The knock on annuities is, "Why would I buy an annuity? They're too expensive and why am I paying this amount of money for tax deferral? Buy mutual funds and term insurance." That's the old adage. Now, what people are looking at annuities for is the risk of living too long.
In 1945, the average male was expected to live to 63, female to age 68. They weren't eligible for Social Security until they were 65. That same male today has a life expectancy of 75 and that female has a life expectancy of 80.
What people don't realize is that the evolution of annuities today makes them incredibly attractive from a flexibility perspective and then even more so if you start to identify key risks facing retirees: longevity risk, inflationary risk and market risk.
Those three things are all answered by many of the annuities in the marketplace today without giving up control of your assets.
When I talk about education being first and foremost, advisers and consumers need to spend the time to get educated because these products work very differently than people believe.
What has happened since the hearings on this in mid-September?
We haven't had any real direction yet from that. Eight hundred responses, there are obviously a lot of various things to consider as we think about this.
From our perspective, we're certainly not saying that this has to be mandated, but one of the things that we do feel strongly about is - this is not a Republican thing, this is not a Democrat thing, this is a math issue - given the reality of what's going on for individual retirement planning, why wouldn't we at least now have a means to inform employees about annuities?
How they work and how they can augment your retirement planning process.
What would you like to see happen?
[In our recent Baby Boomers study,] 80% of the people that we polled said that they would much rather have an investment that gave them a 4% return with no loss of principal versus an investment that had the opportunity to earn 8% but could subject them to market loss - 80%.
So if you think about where we were, I would argue that memories were very short after the dot-com bust and people got back into a very aggressive mode on equities again.
The other thing probably more concerning, when people were polled they were asked, "What do you think you need in retirement income to provide for your basic living expenses?"
The average [response] was $59,000 a year. When they were asked, "What do you think you need in retirement resources to provide $59,000 a year in income?" most people thought they needed $500,000 in resources to give them a lifetime income of $59,000. The number is more like $1.5 million.
So we've got a huge, huge educational gap and the reason is that the entire financial services industry has been so focused on accumulating wealth no one has really spent the time to step back and say, "What am I actually working toward here?"
Let's do a consumption analysis. Let's start to do some thoughtful planning and say, "OK, here's what I can expect from Social Security. Here's what I have in defined benefit. The rest is on my shoulders. What do I need to make up or fill the gap?"
That's the stuff that we're actually seeing now from companies that are embedding consumption tools inside their financial planning tools. You're going to see more and more of this.
Historically, advisers are experts on accumulation of wealth, risk return analysis, profiling. I would urge people to alter the conversation to "what is my end goal?"
The conversation you should be having with clients is, "Let's talk about the requisite income you need to live out your retirement in dignity." These are the things that we're going to want to make sure we have covered with certainty.
