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Investors, Firms Face Retirement Challenges


WASHINGTON - Saving enough for retirement is tough these days. While there are a large variety of retirement vehicles to choose from and last year's tax bill increased contribution limits, as life expectancies increase, saving for retirement has become a tremendous challenge. Consequently, so has providing retirement-oriented investment products, according to Jonathan Pond, an investment adviser and financial writer in Watertown, Mass.

"One thing that's happening is that...achieving a financially comfortable retirement is getting tougher and tougher every year," Pond said last month here at the Investment Company Institute's 2002 General Membership Meeting. Pond moderated a panel of industry executives on advising investors as they prepare for retirement.

A key reason that saving for retirement has become more difficult is simply that people are living longer than ever, Pond said. There is a fear among retirees and pre-retirees that they will outlive their assets. Also, many of the life expectancy tables often used in retirement preparation are more conservative than what they should be, Pond said. That could have significant consequences. Someone who lives into their 90s will need roughly 60% more money than someone who lives to their late 70s, Pond said.

Investors also have more ambitious retirement aspirations, which means they need more money at the time of retirement, and many are unprepared. In fact, 52% of those eligible for Social Security begin withdrawing the money at lower amounts at age 62, Pond said.

Education Sorely Needed

One of the biggest shifts for investors has been in the burden of retirement savings moving from the employer to the employee, with the development of defined contribution plans. While DC plans offer investors a great deal of choice and flexibility, they also include more responsibility on the part of plan participants. For that reason, education has become paramount for investment companies that provide retirement products, said Daniel Reinhold, senior VP and director of retirement plans at San Mateo, Calif.-based Franklin Templeton Investments, which manages approximately $35 billion in retirement assets in 1.4 million accounts.

"It's one thing to sponsor the plan, but you also need to carve out the time to provide education," Reinhold said.

TIAA-CREF of New York, with 2.3 million pension plan participants, is hoping that Congress passes legislation that will allow investment firms to provide advice to retirement plan participants [see "401(k) Reform Legislation Deadlocked," page 3] so that the firm can better serve, said Dennis Foley, vice president of accumulation products at TIAA-CREF.

"People need help," Foley said. "We're limited to giving general guidance under ERISA [the Employee Retirement Income Security Act of 1974], which means things like asset allocation, but not recommendations. The advice concept is very different, and people need that additional help."

"It's crucial to give guidance, and, if [Congress passes legislation allowing it], it will be critical to give advice to investors to help them make key decisions," Foley said.

Rebirth of Conservatism

Although investors have more ambitious retirement aspirations these days, they also have subdued investment expectations, according to Pond. Despite the market decline, Franklin Templeton's retirement plan participants have maintained or even increased their plan contributions, Reinhold said. Within those plans, investors have an elevated interest in putting money into conservative mutual funds, he said. Also, there is a heightened interest in annuity-type products, he added.

"I think annuitization will be [very] important," Reinhold said. "But it's not just annuities. There is a rebirth of annuities and a rebirth of guaranteed principal products in general."

Still, annuities have not gained interest among high-net-worth investors though, said Marc Stern, chairman of the private client Investment policy group at New York-based Bernstein Investment Research & Management, which caters to affluent individuals.

The guaranteed product that high-net-worth investors are flocking to more these days is the charitable remainder trust, which pays income to one or more individuals until the creator of the trust dies, at which point the balance goes to a designated charity tax-free, Stern said.

As competition for retirement assets continues to grow, it is essential for firms to differentiate themselves in that market, and there are a number of ways they can do it, according to Reinhold. One way that firms can improve customer service is by adding more Web-based content, such as retirement calculators, asset allocation tools, educational content and downloadable forms, he said.

Both Reinhold and Foley said that Web usage by their plan participants is increasing and that their firms will continue to enhance their sites.

Despite that, Pond questioned how retirement calculators are used. In addition to life expectancy variables being below what they should be, many calculators allow investors to plug in expected returns than might not be feasible.

"You can have more money than God at retirement if you fiddle with those numbers," Pond said.

Naturally, one key differentiating factor among firms is fees, Reinhold said. Firms looking to attract assets should take a hard look at their rollover fees, he said.