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Funds Work on Cracking Retirement Income Code

To simplify or not to simplify?

That is the question asset management firms working on retirement income programs are asking.

While some investment managers are looking to develop a fast-track approach to retirement income, others believe the issue itself is far too complex to mass-produce.

Different people have different levels of savings. Hold different types of assets, purchased from various advisers and asset managers, all for different reasons over the course of their lives.

They have different goals, legacy targets, responsibilities, risk tolerances, standards of living, health issues and, eventually, life spans.

As a result, managers in the individualized camp are working on a comprehensive, systematic retirement income roadmap that takes investors and their individual viewpoints every step of the way-from accumulation in their earnings years to decumulation in their retirement (see sidebar, "The Six Steps of "PRISM").

This individualized versus mass market approach is being hotly debated as asset managers try to capture the business of the nation's 77 million retiring Baby Boomers, speakers at Money Management Institute's recent Fall Solutions Conference 2011 said.

USAA Financial Services, which serves current or former military personnel and their families, is approaching retirement income as inclusive of all financial products a person touches throughout a lifetime, said Dan McNamara, president.

With a broad base of clients ranging from Gen Y up to Baby Boomers, USAA is also trying to simplify its message to these various constituencies. Last month, USAA debuted a single managed account with a $25,000 minimum, called Account for Life. "There's only one contract, one fee schedule," McNamara said. "For us, it is always about simplicity."

This is not the case at American Funds. "We view retirement income as a very dynamic, very uncertain and highly personal endeavor," said J.C. Massar, chairman of Capital Group/American Funds' Capital International. "So, contrary to some earlier comments, our mantra in the retirement income space is not simplicity-but clarity, flexibility and options. To magically transform this very interrelated issue of retirement income into a simple approach-we are not comfortable doing that."

"We want to provide a perspective that we hope will be different," Massar said. "We will be developing not only materials but web and other digital content that we can deliver to advisers through, most important among them: diagnostic tools that will help advisers and investors make decisions. We are in the process of creating decision-making tools and the ability to execute against those decisions, such as dealing with taxes, alternatives, and annuities together with active management-delivered in a clear, comprehensive, flexible way," Massar said.

Perhaps the most critical component of the retirement income equation, Massar added, is monitoring and managing a client's portfolio.

"We view advising as an ongoing activity," he said. "It is not 'an event.' Providing advice for retirees is a continuous effort. Anything we create needs to have a long timeline and constantly be available for firms, advisers and investors so that they can continually evaluate where they are in retirement."

MMI in fact, has come up with a new name for retirement income: Personal Retirement Income Solution Management, or PRISM, said Jack Sharry, executive vice president of LifeYield and former president of the Private Client Group at Phoenix Investment Partners.

"The next big thing after 401(k)s will be retirement income," Sharry said. "And retirement income is inherently complex."

A sound retirement income program must start with a strong customer relationship management system that can contain and track relevant data on the client, he said.

"Next is how you pull the data together. Some are doing this with a single custodian," Sharry said.

"Next is advice and planning. Next is product allocation-how much into annuities, how much into investments? What is the right mix?

"Next is asset allocation with decumulation in mind," Sharry continued. "That is a different animal, particularly in a volatile world that is not likely to become less volatile anytime soon. Next is the withdrawal sequence. Investors have qualified, non-qualified, individual retirement accounts, individual securities, mutual funds and annuities."

What is the right way to tap into this money? Sharry asked.

The final step, he said, is monitoring a client's status and reporting it to them. Modern portfolio theory and matching investors to investments that fit their risk tolerance work well in the accumulation phase-but not in the income phase, agreed Matt Grove, vice president, guaranteed lifetime income at New York Life.

"The problem for retirement in our view is that it is not nearly that simple," Grove said. "You need to apply an individualized financial planning approach, which takes hours of time, highly skilled people and asking dozens and dozens of questions."

Grove believes the industry will "figure out which portfolio is best for a retiree in minutes, not hours, to serve the millions of people in need of retirement income management."

As a specialist in guaranteed lifetime income, Grove said that much of this can be solved through annuities. "Annuities are a very different asset class that creates a more robust portfolio," he said.

Clearly, as evidenced by the viewpoints at the MMI meeting, industry executives may agree on the new PRISM name for retirement income, but have yet to reach consensus on how to get there.



The Six Steps of PRISM: Personal Retirement Income Solution Management

1. Aggregating household assets, expenses and other financial information.

2. Assessing an investor's current and projected savings, future financial needs and how much income those savings will produce in retirement.

3. Planning how to achieve sustainable spending and manage uncertainties and risks

4. Guiding investments and allocation of assets, through accumulation and decumulation

5. Sequencing use of income and withdrawal of assets

6. Reporting use of money and assets against objectives

Source: Money Management Institute