When people are faced with a pending crisis, two immediate thoughts usually come to mind - "How will I be affected?" and "What do I have to do to protect myself and/or my family?" In the best-case scenario, an individual can execute a pre-planned strategy designed to manage the situation and mitigate any potentially negative impact. The true measurement of proper preparation in crisis planning is how well one's losses are minimized in the end.
Today, retirement income planning is a key component of the financial services industry that is facing a crisis of its own. Insurance companies and their peer financial services firms are faced with the critical obligation of helping ensure that working individuals achieve financial security for themselves and their families in retirement. One strategy that has generated strong interest among product providers is the concept of retirement plan rollovers. Insurers, for example, have recently become more visible in the rollover market and are now competing directly with mutual fund companies and wirehouse firms, which traditionally have had a stronger presence in providing rollover services to their clients.
The retirement plan rollover market is a significant opportunity for the financial services industry to proactively address the evolving needs of its customers. However, rollovers could be a significant threat to firms within the industry that are not equipped to compete. Financial Research Corporation recently estimated that rollover assets will grow to $1.9 trillion by 2010, and annual rollovers are estimated to be more than $400 billion by the end of the decade. With such a significant amount of money in motion over the next few years, rollovers are a viable opportunity for advisers to not only grow their practices, but also to provide a critical service for their clients as they approach retirement age.
The largest segment of the population (77 million Americans) is expected to reach retirement age during the next 15 to 20 years. As a result, the shift from asset accumulation to income distribution is a significant factor that will shape the future of the industry. Within this shift, however, longevity issues have caused many individuals to fear that they will run out of money in retirement. To help their clients address these kinds of fears, it is important that advisers have the proper tools to create customized retirement income plans.
Helping Clients Understand Their Rollover Options
One of the most effective ways for advisers to help their clients understand their retirement options is to position themselves as trusted retirement planning experts. Advisers can achieve the expertise they will need in retirement planning through two primary avenues -- gaining the knowledge through self-study, or by partnering with a team of professionals who specialize in specific areas of the process. It's unrealistic for an adviser to be an expert in every component of the financial planning process. However, by creating partnerships with tax professionals, accountants, and attorneys, advisers have an opportunity to establish the long-term client relationships that are critical to growth in their practices.
One of the best sources of possible retirement candidates is the adviser's current book of business. By becoming proficient in identifying the retirement income needs of their clients, advisers will mitigate the risk of losing them to competitors. Usually, clients who are rollover candidates are either facing a job change, are within five years of retirement, or are currently participating in an employer-sponsored plan that is terminating. They might ask, "When do I need to begin worrying about what to do with my employer-sponsored retirement plan?" and, "What can I do with the assets I've accumulated in my employer-sponsored retirement plan?"
There are four choices available for clients who are considering moving assets out of their employer-sponsored plans:
o Take a cash distribution, which gives clients immediate access to their funds; however, it could leave a large tax bill and less money available for retirement.
o Leave their money in the existing plan, so clients can potentially grow their assets on a tax-deferred basis and won't have to go through the administrative efforts of tranferring to another plan. However, the plan structure may change over time and place certain restrictions on former employees who decide to remain in the plan.
o Transfer assets to their new employer's plan so clients can take advantage of the tax-deferral benefits. A new plan may also offer benefits that were not available under the client's old plan. On the other hand, the new employer's plan may not accept rollovers and might have restricted distribution offers.
o Roll their money into an IRA that offers tax-deferred growth potential. By using a direct rollover, clients will not be subject to the 20% mandatory federal withholding tax placed on cash distributions. Furthermore, if the client is under 59 1/2 , they will avoid the 10% federal early withdrawal penalty. However, loans are typically not available within IRAs and there may be other tax consequences to consider as well.
The Importance of Education
Recent industry statistics show that although large plan providers are currently implementing education programs for their employees, these services are Usually not available for smaller plans. Cerulli Associates, a financial services research firm, estimates that 52% of all defined contribution plan participants are in plans with less than $50 million in total assets. Many small employers do not even have a retirement plan in place. With these findings as a backdrop, client education will ultimately become the responsibility of the adviser, who will seek stronger partnerships with product providers to help broaden his or her training and expertise.
For most Americans who are entering retirement, financial security means establishing a dependable stream of income, or a "retirement paycheck," that will enable them to maintain their current standard of living. The primary responsibility of retirement savings has begun to move from employers and the government to the shoulders of individual workers. Over the next two decades, retirement income streams will be generated primarily from the personal savings of retirees because retirees will no longer be able to depend upon their employer-sponsored defined benefit plan or Social Security benefits to support their income needs.
With the continued emphasis on the personal responsibility that workers must now accept to create a secure retirement income, advisers play an increasingly important role in helping their clients choose appropriate products for their specific financial needs. For most clients, their retirement plan distribution will be one of the largest amounts of money they will ever receive in a single check, and they will need professional guidance as they navigate the landscape of rollover options. Product offerings, such as annuities, can serve to bridge the gap between the pre-retirement focus on asset accumulation and the post-retirement need for the distribution of assets in the form of consistent guaranteed income streams.
As the competition for retirement assets intensifies, advisers need product partners who can help them meet the diverse income distribution needs of their clients and offer support throughout the entire income planning process. More product providers are seeing the opportunity to serve their customers in the rollover market and are thus increasing the number of educational and support resources available to help advisers create retirement income plans for their clients and, ultimately, to grow their practice over the long term.
The pending crisis in the retirement marketplace will soon have a real impact on millions of Americans, and will consequently influence how advisers conduct their business. Specific issues, such as longevity and the prospect of outliving accumulated assets, will continue to be significant drivers of change in the retirement market. As the availability of potential retirement income sources for clients continues to shrink, advisers should be seeking to establish dependable income streams that can provide comfort for their clients during their retirement years.
Luis Gomez is vice president, marketing strategy for Jackson National Life Distributors LLC. He joined the company in 2002 and has more than 13 years of experience in the financial services industry. He is responsible for developing strategy and providing marketing support for company initiatives.
