BOSTON — Regulatory changes are likely to increase participation in defined-contribution programs, and financial services companies are considering how to prepare and benefit from that shift.
They will need to do more than trot out familiar investment products to capture some of the retirement assets created by new federal regulation, according to analysts and executives at last week's Third Annual Managing Retirement Income conference here.
Jerome P. Kenney, a vice chairman at Merrill Lynch & Co. Inc., said that under the
The legislation requires employers to automatically enroll employees in a retirement program. Research by Merrill Lynch concluded that this will boost participation in defined-contribution programs, currently at 66%, to 90%
Fidelity Investments
Fidelity said it concluded from a survey it conducted in the fall that adoption rates would probably continue to go up this year.
The Boston company, which released the survey Thursday, polled 400 plan sponsors that did not offer automatic enrollment programs. Of those, 44% said they were considering adding auto enrollment, 27% were considering adding an automatic deferral increase feature, and 31% were considering adding life-cycle funds as a default in their 2007 workplace savings plan design.
Mr. Kenney agreed that auto enrollment has led to more sales of target-date funds and less investing in insurance products and money market funds. According to research by BlackRock, 87.6% of retirement plans use asset-allocation products as the investment vehicle into which customers are automatically enrolled, and 52.6% of the asset-allocation products chosen are target-date funds.
"Variable annuities are not as popular as they should be, despite all the features," Mr. Kenney said.
Executives said banks and financial services firms need to blend investment and insurance products in their portfolios.
"The combination of insurance and investment solutions are more powerful than insurance-only solutions or investment-only solutions," said Garth Bernard, a vice president with MetLife Inc.'s retirement strategies group.
Zvi Bodie, a professor at Boston University's school of management, said studies indicate that investors tend to stick with the default option offered by their 401(k) plan. He said the defaults should not just be target-date funds; they "should be a low-risk alternative that returns retirement income for life."
Prof. Bodie said investors want a product that they will not have to think about. Ironically, that means they want something that looks and feels like a pension plan. "The default option should be something DB-like, and no one except MetLife with their Personal Pension Builder is really doing that," he said.
Mr. Bernard said MetLife combines its income annuities with an investment portfolio to create its personal pension plans. This turns "defined contribution into a more defined-benefit-like plan," he said.
John Bahnken, the president of Bank of America Corp.'s global wealth and investment management's products group, said the Charlotte company is developing a simple "defined-benefit-like plan that offers imbedded advice."
Too many providers are "focused on what makes sense to sell rather than what the clients need," and annuities are too complex, Mr. Bahnken said. "The industry has to realize that some clients are perfectly suited" to use savings accounts and certificates of deposit to save for retirement, he said.
Michael J. Graci, a vice president of retirement services with BlackRock, which is partly owned by Merrill Lynch, said financial services companies need to be looking for the "next generation" of asset-allocation funds.
"We need a wider range of products," he said. "We need asset allocation funds that aren't static. We need tactical asset allocation products that can be shifted into other asset classes."
Lynne Ford, the head of retail retirement services at Wachovia Corp., said that since 2002 the Charlotte banking company has put more emphasis on retirement and retirement savings. Two years ago it created a retirement and investment products group in an effort to improve its products and find ways to distribute them nationally, she said.
Lifetime Retirement Planning with Wachovia, which was rolled out in January, offers free retirement consulting to the company's mass-market customers. "We have all the necessary pieces to offer holistic retirement services to our customers," Ms. Ford said.
B of A's Mr. Bahnken said consumers preparing for retirement want a steady stream of dependable income, asset protection, and simplicity. "We have a long way to go before we are delivering everything our clients really need for retirement," he said.
Ms. Ford said annuities are "part of a spectrum of products" that customers should consider in retirement planning.
Thomas H. MacLeay, the chairman, president, and chief executive officer of National Life Group in Montpelier, Vt., said "there is no one-size-fits-all" answer. "There needs to be products, but they need to be flexible enough to tailor to every situation."
David Macchia, the CEO of Wealth2K Inc. in Hingham, Mass., said: "The companies that ultimately win won't necessarily be the ones with the best products. They will be the companies that learn to best communicate with tech savvy customers."
