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Get Ready For the Rollovers: New Products Should Provide Retirees Stability, Security


BOSTON-By 2011, Baby Boomers will move roughly $2.1 trillion out of individual retirement accounts (IRAs), according to analysts. And approximately $1.9 trillion is likely to roll out of the control of whichever company holds them now and into the hands of a competitor, according to Laura Varas, an analyst with Financial Research Corp. (FRC) in Boston.

Adding in the anticipated rollover of defined contribution and 401(k) plans, in addition to investment-only accounts, the total amount of assets in play is expected to be close to $5.1 trillion.

Companies that want to keep control over Boomers' assets in retirement-or capture those managed by someone else-are going to have to be innovative, catering to the concerns of retirees, providing products to address them, and perhaps most importantly, getting their story out to both consumers and their financial advisers-and fast. And those main concerns are income, security, flexibility and healthcare.

"This is the nut all distributors are trying to crack," Varas said during a presentation at the FRC MarketTrends: Institutionalization of Retail Investment Markets conference here.

Powerhouses such as Merrill Lynch and MassMutual have already introduced programs to target those over 55, who control about 70% of the investible wealth in the United States. Those over 65 represent the wealthiest segment of investors, controlling 40% of the wealth, according to FRC data.

Overall, retirees want guidance. A FRC survey of 60-year-olds with between $250,000 and $2 million worth of assets-so-called "power Boomers"-found they had sought investment advice, but they preferred that guidance be informal.

Retirees who got advice were quick to take action. Thirty-nine percent of retirees surveyed reallocated their portfolios to become more conservative, and 25% of retirees consolidated accounts. Those figures jumped to 43% and 36%, respectively, for those with between $1 million and $2 million. Such changes could mean significant outflows for companies that don't have products to address retirees' needs.

When it comes to those products, retirees like them simple. One such example is separately managed accounts (SMAs). Although only 20% of retirees have purchased SMAs, those who have tend to rely on them heavily, investing, on average, 30% of their assets, Varas said.

"The number one thing people like is income," she said. And income is what rollover product pioneers have focused on.

"Determining a month-to-month cash flow is challenging for clients," said Jennifer Bennett, vice president of retirement marketing for New York-based Merrill Lynch. "We want people to feel there is a 90% to 95% chance they can achieve their goals," she said.

To provide that, the Merrill Lynch Retirement Income Service program not only guides advisers on determining the strategies and product mixes to best suit their clients, but also includes what Merrill calls its "personal paycheck," essentially delivering investors a monthly ration of their assets, based on their regular expenses, from electric bills to credit card purchases.

In a survey of retirees, Merrill Lynch found that among those who had a solid retirement plan, 67% felt well prepared, compared to only 23% of those without plans. Acting like an allowance, or a pension, the "personal paycheck" service helps reinforce investors' confidence that their remaining assets are under control, while relieving advisers of the task of managing their clients' day-to-day banking. Paychecks can be adjusted for one-time expenses or changing circumstances. Clients also receive a "report card" that illustrates whether their spending is on par with their longer-term plans.

While 38% of respondents in the Merrill Lynch survey said that they planned to work, at least part-time, in retirement, the idea behind the program is to build confidence. Apparently, investors across income brackets seek that sense of security. When the program was first introduced in September, the company expected the product to be most popular with clients who had between $250,000 and $500,000 in assets. Bennett said Merrill was surprised by the demand among those with $2 million in the bank.

"Retirement is like an earthquake. It's preparing not just for what you know will happen, [but also for] what you don't," Bennett said. Thus, products that help hedge healthcare expenses will likely have a large audience, Varas said.

MassMutual's model, introduced in June, slowly moves clients over time into annuities that provide a predictable income stream.

"The question is, how do you balance flexibility with security?" said Peter Geismar, vice president and product manager of the Boston-based company's retirement income solutions group.

MassMutual's ladder-like approach helps strike this balance by complementing the typical pattern people face in which they need more liquid assets when they first retire but as time progresses, their expenses become more fixed.

Clients also determine, based on their overall goals and immediate circumstances, whether to derive the income from their funds, reinvest it by purchasing new funds, or use gains to buy annuities. Likewise, annuity income can be reinvested, used to purchase a different type of investment product, or taken as cash.

"You have to offer flexibility," Geismar said. The more flexible the program, the more confident clients will be that their specific needs are being addressed, and the more comfortable they will feel.

The demand for rollover products, has just begun, Varas said. But to avoid being steamrolled by the competition, products must be easy to understand not only for investors, but also for advisers. "They want a neat extension of their practice," Geismar said. That means products that are simple to sell, easy to manage and allow advisers time to spend with clients, not balance sheets. Besides transparent structures, competitive companies will need to provide advisers with tools, marketing materials and public education campaigns.

"It's going to be a long development cycle," Varas said.

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