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Rollover Challenge Called Formidable

SAN DIEGO, Calif. - Mining assets being distributed from qualified retirement plans will be a critical issue for firms as baby boomers retire, according to industry executives and consultants who spoke at the 2000 Operations conference of the Investment Company Institute of Washington D.C., held here last week.

"Seventy-seven million baby boomers will retire over the next fifteen to twenty years," said Doff Meyer, senior vice president of marketing at Delaware Investments of Philadelphia. "$10 trillion will be up for grabs in the next decade or two. This is a huge issue and we're talking about a lot of money."

When individuals do rollovers, they are taking the money out of the company, she said.

"Most employees don't know their retirement plan provider or adviser well," said Meyer. "[The Spectrem Group of Philadelphia] estimates that 85 percent of participants who rolled did not stay with the retirement plan provider. That's a huge issue for those of us in this business because what we're seeing is assets go out the door."

From August 1999 to August of this year 10 million people removed $402 billion out of retirement plans, according to Catherine McBreen, director of consulting at the Spectrem Group.

Sixty-six percent of that went into rollover IRAs, said Meyer, citing Spectrem data.

"Mutual fund companies gained 31 percent of larger balances through direct sales," she said.

Competition for these assets will force companies to focus on what the needs of the consumers are, she said.

"Baby boomers want a personal, face to face relationship with their retirement provider, but that in no way removes their desire for 24 hour Internet access to their accounts," she said. "They also want to be able to have a full and broad discussion about retirement, not just about a 401(k) plan. I think one point of contact, a packaged good, is key. You have to figure out how to aggregate the aspects of a person's life, not just the financial side. They want to go on the Internet and see it all in one place."

McBreen also said that more comprehensive services will be necessary in plans.

"We surveyed individual consumers and participants and found that advisers only give a piece of what they need," she said. "They want a holistic' financial picture."

If companies can adapt to these needs, the assets will follow, speakers said.

"Loyalty to a given financial institution is in question," said McBreen. "It's impacted by multi-fund offerings and new distribution methodologies, namely the Internet."

The major factors for a consumer selecting an IRA company are ease and convenience, said McBreen.

"You have to keep this in mind when you think about your plans from a marketability and operational standpoint," she said. "You have to get in their face and let people know what you're offering. Incorporate all media, Internet, newsletters, and statements. And make it easy for them. Provide services that are easy to use like electronic and paper pre-populated forms that simply require an approved signature."

It is a problem for plan providers that they are not presenting themselves as diversified service providers, said McBreen.

"Plan providers have not done a good job in extending their relationship beyond the role of retirement services," she said. "Eighty percent of consumers who invested a retirement plan balance said that the company they invested in did not provide any of the investments in the retirement plan they withdrew from."

The increase in retirees over the coming years has evoked legislative responses.

"These are things politicians are very much concerned about and individuals are grappling with," said Russell Galer, senior counsel at the ICI. Recently enacted legislation, such as tax-free distributions, Roth IRAs and the Excess Distribution and Retirement Accumulation Penalty Tax Repeal of 1997, is changing the retirement plan environment, said Galer. Estate tax reform, minimum required distribution reform, and Medicare are also issues recently debated, said Galer.

Also, the Retirement Security and Savings Act of 2000 (H.R. 1102) is currently before Congress. The bill would increase contribution limits and add incentives for low-income savings and small business operations, said Galer.

"New legislation brings newer challenges to financial companies," said Galer. Companies have to change systems, train employees, and increase communication efforts and materials to accommodate the new legislation, said Galer.

"With these burdens, however, comes opportunities," he said. "There are more opportunities for boomers to save in existing products, there is increased attention given to retirement issues, and there is increased demand for advisory services and new types of products."