CAMBRIDGE, Mass. - Banks are in position to gather much of the $20 trillion expected to flow from retirement plans in the next 20 years, but only a few are well prepared to do so, experts and bank executives say.
Wachovia Corp., Wells Fargo & Co., and the two big Pittsburgh banking companies - PNC Financial Services Group Inc. and Mellon Financial Corp. - are mentioned as ready with retirement income products to manage the assets the baby boom generation will be rolling out of 401(k)s and IRAs in the next two decades.
But most banks are unready to grasp the opportunity, Jerome P. Kenney, a Merrill Lynch & Co. vice chairman in charge of its executive client coverage group, said at a Managing Retirement Income conference here last week. Despite the fact that banks have broad access to investors who need retirement income planning, he said, only a few will exploit this strength.
"The top five or six banks, the Wachovias and the Wells Fargos, will succeed," Mr. Kenney said. "But most banks don't have the capabilities" - the products and investment platforms - "to provide these types of services."
Financial Research Corp., a Boston research firm, says it expects $20 trillion of assets to flow out of defined contribution and defined benefit plans and into the hands of retirees during the next 20 years. And McKinsey & Co., a London-based research firm, predicts retirees and preretirees will hold 67% of all U.S. assets by 2020.
Analysts agree that this rollover is the most significant opportunity available in the next two decades for gathering new assets.
"The good news is, banks have a relationship with these people that are retiring, and they have a strong distribution network," said Ronald P. O'Hanley, a vice chairman at Mellon and the president of its institutional asset management division, "but the bad news is that these retirement management products are complicated. Banks have struggled selling complicated asset management products."
The asset management industry is built on asset accumulation, he said, and most companies, including banks, have not begun to consider what will happen to these assets as baby boomers retire.
Mellon is different, he said. It has spent the past year moving its Dreyfus mutual fund subsidiary closer to its institutional asset management business, he said, in order to develop tighter connections between these clients and product development.
"Retirement is not the end, it is another part of the asset management process," Mr. O'Hanley said. "A person could live in retirement for up to a third of their life. We have to work to develop products and methods to serve that client base."
Merrill's Mr. Kenney said banks could gather significant assets just by retaining assets rolled out of IRAs. The best rollover retention rates are still less than 50%, he said, and the top three IRA asset gatherers hold more than $200 billion of IRA balances.
"This is a very profitable business, and some firms are clearly making it a priority," he said. "Most banks are not making it a top priority, and that is a mystery to me."
Salim Ramji, an analyst at McKinsey, said that, just in the next five years, $2.8 trillion of net flows can be expected as people retire and about $1.25 trillion of these flows will move directly into bank deposits. But still institutions are not taking advantage of this "inertia to banks," he said.
"Banks traditionally are lagging in the investment business and are facing an uphill battle from a brand perspective," Mr. Ramji said. "But when people retire they do tend to turn to banks. Even if it is for something mundane like increasing a CD allocation, this creates a real opportunity for the bank channel."
Laura Varas, an analyst at Financial Research, asserted that banks are "extremely well-positioned" because of their customer base and this customer inertia. "With their strong trust and estate businesses already established, banks like Wachovia and PNC Financial Services can really accumulate assets as people enter retirement," she said.
Wachovia has carefully aligned its capital management group so that customers with 401(k) plans in its retirement and investment products group can roll assets directly into a Wachovia IRA or an Evergreen investment product after they retire, said Dennis Ferro, the president and chief executive officer of the Evergreen Investments mutual fund unit.
Retirement "is a big opportunity for Evergreen, and it is a big opportunity for Wachovia overall," he said.
Wachovia introduced three lifestyle funds Monday that Mr. Ferro said are the type of asset allocation products attractive to people entering retirement.
For any firm to succeed, Mr. Kenney said, it is essential to establish now a platform of products and services. He said 80% of people entering retirement will turn to advisers. "People need a guaranteed income stream" in retirement, he said, and they need to talk to an adviser to establish it.
For banking companies too small to develop their own investment platforms, there are third-party providers with sophisticated products.
FundQuest, the Boston wealth management arm of BNP Paribas, was among the first companies to establish such a platform. Last October, it launched FundQuest Retirement Management Services, which it is outsourcing to banks and other financial services companies. The platform can meld a company's investment and product platform with best practices for the administration of retirement assets and income.
Robert Del Col, FundQuest's president and chief executive officer, said his company had spent several million dollars on developing the platform. Insurance companies are still ahead of banks in preparing products to take advantage of the retirement-asset opportunity, he said.
"Banks have an enormous concentration of older customers, and because of this customer base, banks have an enormous opportunity if they develop a cadre of trained people and the right tools to serve these people," he said.
Daniel Rosshirt, a senior manager at Deloitte Consulting LLP, said people entering retirement are more likely to go to an insurance company than their bank because they perceive the best and safest products to be insurers'.
"You are going to see more control moving to the adviser to determine where and how consumers invest and the types of products they use," he said.
Mr. Kenney said intermediaries want to deliver products imbedded with advice to make them easier to comprehend. Such products include life-cycle funds, separately managed accounts, asset allocation funds, multidisciplinary accounts, and different insurance products, he said.
Srinivas D. Reddy, the head of product strategies at ING Financial Horizons, a Hartford, Conn., division of ING U.S. Financial Services, said insurance solutions such as immediate annuities, withdrawal benefits for life, and minimum income guarantees are among the product twists that customers will be seeking.
"There isn't just one packaged solution that will ultimately succeed," he said.
McKinsey's Mr. Ramji agreed that companies must alter their product emphasis. Most offer products such as mutual funds and annuities that are geared toward accumulation, he said, but "firms need to offer products that meet income and distribution needs."
Products that combine asset management and insurance will succeed, he said, but more important than products is advice. For the most part advisers are unready, according to a McKinsey survey that found 65% of consumers believing that advisers are not prepared to advise them on retirement.
Mr. Ramji said that, if advisers are unprepared, customers will move to the more self-directed approaches offered by companies like Fidelity Investments and Charles Schwab Corp.
Steve Deschenes, an executive vice president of marketing at Fidelity, said that companies need to take a more "planning-centric" approach in order to attract customers and assets. Fidelity offers an income management account to help people in retirement, he said, and the product, which was launched in 2004, accumulated 200,000 plans in its first year.
"Planning trumps any product decisions," he said.
Mellon's Mr. O'Hanley said his company has aggressively launched products including lifestyle funds and equity income funds for advisers to use as their customers retire. "We have the product, but we also have the benefit of owning Dreyfus," he said. "We are well-positioned to deal with this."
Some players, including Fidelity and Vanguard Group, are ready to exploit this opportunity, he said, but a lot of traditional institutional managers, who have focused on selling defined contribution and defined benefit plans, are not.
"This is a real growth opportunity for us," he said. "This is an opportunity to develop new client relationships because a lot of firms aren't positioned to go after this market."
